The thesis reviews the research on financial market sentiment with a focus on textual analysis; analyzes the relationship between market sentiment and financial markets by taking an external shock of COVID-19 and an intrinsic factor of the business cycle, respectively; and provides the role of monetary policy in shaping this relationship. First, the thesis discusses formation reasons, measurement methods, and empirical applications in the financial market around the financial market sentiment. Existing studies present that, as a manifestation of bounded rationality, market sentiment will cause assets to deviate from their fundamentals, which cannot be eliminated through arbitrage. Textual analysis is widely adopted among the many ways to evaluate market sentiment due to its flexibility and variety. Applications on market sentiment in asset pricing and corporate finance are also summarized. Next, the thesis adopts textual analysis to explore the impacts of market sentiment on the stock market during the COVID-19 pandemic, including the role of government policy support and vaccine research and distribution. The findings show that at the onset of the pandemic, concerns about COVID-19 can supersede economic pessimism in standard times and negatively impact the stock market. Furthermore, the proposal of corresponding policies and the progress of medical treatment have promoted the stock market's recovery to a certain extent and mitigated the impact of COVID-19 on the stock market. Then the internal factor of the business cycle is introduced. After constructing a text-based cyclical sentiment index, the heterogeneous performance of the market under different business cycles and the predictability of the business cycle are unfolded. The findings suggest that higher levels of pessimism are associated with lower excess returns during recessions, and higher levels of pessimism can promote higher trading volumes during expansions. In addition, the index can also be used to forecast the stages of the business cycle. Finally, the thesis examines the roles of market sentiment in the relationship between the stock market and Federal Open Market Committee (FOMC) announcements. By examining the media coverage in the three days before and after FOMC meetings, the results of how the pre-meeting investor expectations and post-meeting investor responses affect the relationship between monetary policy and the stock market are estimated. The findings present that the Fed's decision-making is affected by market sentiment, and the Fed's decision-making temporarily affects the short-term future stock market. In contrast, investor sentiment before the meetings affects the long-term stock market. In addition, media coverage can be regarded as a predictor of future stock market risk.
Textual Analysis of Financial Market Sentiment
Zhang, K. (Author). 1 Jan 2024
Student thesis: Doctoral Thesis › Doctor of Philosophy