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News Entropy

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  • Kuhlen, N.
  • Preston, A.

Abstract

We introduce the concept of ’news entropy’ to characterise the relationship between news coverage and the economy. Intuitively, news entropy decreases as the news focus on a smaller set of pressing topics. We observe that news entropy exhibits clear negative spikes close to important economic, financial, and political events. Investigating the effect of changes in news entropy, we find that decreases are associated with two key features: an increase in uncertainty measures and a macroeconomic contraction. The variable is priced in the cross-section of stock returns and low news entropy is associated with increased stock price volatility at the firm level.

Suggested Citation

  • Kuhlen, N. & Preston, A., 2021. "News Entropy," Cambridge Working Papers in Economics 2131, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:2131
    Note: nk490
    as

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    References listed on IDEAS

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    1. Whitney K. Newey & Kenneth D. West, 1994. "Automatic Lag Selection in Covariance Matrix Estimation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(4), pages 631-653.
    2. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, May.
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