Quantifying Narratives and Their Impact on Financial Markets

Abstract

This article introduces a media coverage–based approach to quantify narratives and develops methodologies to explain the extent to which narratives drive financial markets and returns of investment portfolios. The authors show that media-derived narratives may contain predictive information for market returns beyond traditional macro indicators. Finally, the authors demonstrate that narrative indicators can be used to enhance asset-allocation strategies and to gain or hedge exposure to narratives by constructing portfolios of narrative-sensitive assets. These findings contribute to our understanding of how narratives influence financial markets and their impact on asset prices.