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Does Financial News Predict Stock Returns? New Evidence from Islamic and Non-Islamic Stocks

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  • Narayan, Paresh Kumar
  • Bannigidadmath, Deepa

Abstract

The paper extends the time-series financial news data set constructed by Garcia (2013) and uses it to examine whether financial news predicts returns of Islamic stocks differently compared to non-Islamic (conventional) stocks. We find that they do. First, while both positive and negative worded news predict most Islamic and conventional stock returns, positive words have a larger impact on both types of stock returns. Second, shock to returns from financial news reverses only in part for some stocks. Third, for a mean-variance investor, investing in Islamic stocks is relatively more profitable than investing in the corresponding conventional stocks. Fourth, we show that profits are robust to a range of time-series risk factors, namely, market risk, size-based risk, and momentum-induced risk.

Suggested Citation

  • Narayan, Paresh Kumar & Bannigidadmath, Deepa, 2017. "Does Financial News Predict Stock Returns? New Evidence from Islamic and Non-Islamic Stocks," Pacific-Basin Finance Journal, Elsevier, vol. 42(C), pages 24-45.
    • Handle: RePEc:eee:pacfin:v:42:y:2017:i:c:p:24-45
    DOI: 10.1016/j.pacfin.2015.12.009
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