Investor attention has long been noticed as an important driving force of stock returns. A large number of papers have been focusing on providing direct or indirect proxies for overall investor attention . However, we believe that additional attention is a more crucial driver than overall attention in affecting stock returns . In this paper, we propose a new class of predictors, media connection indices (MCI), using news tones of media news that mentions more than one stocks to proxy effects that induced by additional attention , i.e. sentiment spillover, sentiment co-movement and connected news coverage. In general, we show our predictors are powerful and outperform other predictors, such as sentiment indices and economic predictors, in terms of both in-sample and out-of-sample predictability. In-depth analysis show that the predictability of MCI mainly comes from negative news tones which is consistent with \mbox{%DIFAUXCMD Tetlock2008 .
We examine the effect of investor attention spillover on stock return predictability. Using a novel measure, the News Network Triggered Attention index (NNTA), we find that NNTA negatively predicts market returns with a monthly in(out)-of-sample R-square of 5.97\% (5.80\%). In the cross-section, a long-short portfolio based on news co-occurrence generates a significant monthly alpha of 68 basis points. The results are robust to the inclusion of alternative attention proxies, sentiment measures, other news- and information-based predictors, across recession and expansion periods. We further validate the attention spillover effect by showing that news co-mentioning leads to greater increases in Google and Bloomberg search volumes than unconditional news coverage. Our findings suggest that attention spillover in a news-based network can lead to significant stock market overvaluations, and especially when arbitrage is limited .
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Investor attention has long been noticed as an important driving force of stock returns. A large number of papers have been focusing on providing direct or indirect proxies for overall investor attention . However, we believe that additional attention is a more crucial driver than overall attention in affecting stock returns . In this paper, we propose a new class of predictors, media connection indices (MCI), using news tones of media news that mentions more than one stocks to proxy effects that induced by additional attention , i.e. sentiment spillover,
We examine the effect of investor attention spillover on stock return predictability. Using a novel measure, the News Network Triggered Attention index (NNTA), we find that NNTA negatively predicts market returns with a monthly in(out)-of-sample R-square of 5.97\% (5.80\%). In the cross-section, a long-short portfolio based on news co-occurrence generates a significant monthly alpha of 68 basis points. The results are robust to the inclusion of alternative attention proxies,
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co-movement and connected news coverage. In general, we show our predictors are powerful and outperform other predictors, such as sentiment indices and economic predictors, in terms of both in-sample and out-of-sample predictability. In-depth analysis show that the predictability of MCI mainly comes from negative news tones which is consistent with \mbox{%DIFAUXCMD Tetlock2008
measures, other news- and information-based predictors, across recession and expansion periods. We further validate the attention spillover effect by showing that news co-mentioning leads to greater increases in Google and Bloomberg search volumes than unconditional news coverage. Our findings suggest that attention spillover in a news-based network can lead to significant stock market overvaluations, and especially when arbitrage is limited