4 Overall, our findings are robust to a variety of tests and extensions. Importantly, we show that results are stable over time and across countries (EMs and AEs), are not driven by extreme values or crisis events (such as the Global Financial Crisis) or by the presence of key countries – such as the US – in the sample. They are also robust to an alternative measure of sentiment based on a “Term Frequency - Inverse Document Frequency” (“TF-IDF”) weighting of words. Since we control for the number of articles published every day, the effect we capture is also unlikely to capture the volume of news, as opposed to its tone.

Taken together, our results are consistent with shocks to investors sentiment, affecting both advanced and emerging countries, during which local news and their tone affect investor sentiment and prices momentarily before returning to their fundamental values. From a theoretical perspective, this finding is consistent with the presence of noise (or liquidity) traders (DeLong et al (1990), Campbell (1993)). Although we are not able to identify which theory prevails, using capital flows data reveals that such traders are more likely to be foreigners than locals. The response of equity prices to global news sentiment shocks is, however, more ambiguous. The longer and more permanent impact on world stock markets is consistent with global news containing genuinely new (good or bad) information on global fundamentals that is only slowly incorporated into stock prices. An alternative explanation is that sudden changes in global news sentiment are strong enough to cause drifts in investors’ sentiment that do not reverse in the short run, even in the absence of new “hard” information about fundamentals. The fact that global news shocks have a stronger impact in troubled times, when investors are more anxious, support this interpretation (Garcia, 2013).

This paper relates to the growing body of research investigating the link between the news media, investor sentiment, and asset prices, in particular Tetlock (2007) and Garcia (2013). We contribute to this literature in several ways. To our knowledge, we are the first to assess the link between news sentiment and equity returns in a large sample of advanced countries and emerging countries using a large dataset of news.<sup>2</sup> Extending the analysis to other countries allows us to isolate the contribution of global sentiment and highlight its differential effect. Finally, we are the first to assess the effect of sentiment shocks on high frequency capital flows data. Beyond validating the results obtained on prices, our results cast a light on _who_ are the investors most sensitive to sudden changes in sentiment. More generally, we are closely connected to the vast empirical literature on investor sentiment that has focused on how to measure investor sentiment and to quantify its effects on a variety of financial market outcomes (See Baker and Wurgler (2007) for a review). With respect to that literature, we confirm the value of media text (and tone) in in capturing investors’ sentiment.

> 2 For instance, Garcia (2013) and Tetlock (2007) use one column in one newspaper per day to capture US news sentiment, representing roughly 30.000 and 3.000 articles respectively. For the US only, we use 1.8 million articles.