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Narrative Asset Pricing: Interpretable Systematic Risk Factors from News Text

Author

Listed:
  • Leland Bybee
  • Bryan Kelly
  • Yinan Su
  • Tarun Ramadorai

Abstract

We estimate a narrative factor pricing model from news text of The Wall Street Journal. Our empirical method integrates topic modeling (LDA), latent factor analysis (IPCA), and variable selection (group lasso). Narrative factors achieve higher out-of-sample Sharpe ratios and smaller pricing errors than standard characteristic-based factor models and predict future investment opportunities in a manner consistent with the ICAPM. We derive an interpretation of the estimated risk factors from narratives in the underlying article text.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online

Suggested Citation

  • Leland Bybee & Bryan Kelly & Yinan Su & Tarun Ramadorai, 2023. "Narrative Asset Pricing: Interpretable Systematic Risk Factors from News Text," The Review of Financial Studies, Society for Financial Studies, vol. 36(12), pages 4759-4787.
    • Handle: RePEc:oup:rfinst:v:36:y:2023:i:12:p:4759-4787.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhad042
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    More about this item

    JEL classification:

    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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