Does official media sentiment matter for the stock market? Evidence from China

Abstract

We develop a novel official media sentiment index (NegGovOp) for China’ stock market using textual analysis combined with BERT. We find that NegGovOp predicts market return reversals. The return-reversal pattern is concentrated among difficult-to-arbitrage stocks, during recession period and the trading days which are not directly following weekends or holidays. We further find that official media sentiment primarily affects the trading activities of retail investors and significantly predicts market trading volume, market volatility and investor sentiment. Our findings are in line with the behavioral model that official media sentiment contributes to shaping irrational investor sentiment and resulting in temporary mispricing.