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Music Sentiment and Stock Returns Around The World

Journal

Journal of Financial Economics

Subject

Finance

Publishing details

Journal of Financial Economics 2022 Vol 145:2 p 234-254

Authors / Editors

Edmans A;Fernandez-Perez A;Garel A;Indriawan I

Biographies

Alex Edmans

Publication Year

2022

Abstract

This paper introduces a real-time, continuous measure of national sentiment that is language-free and thus comparable globally: the positivity of songs that individuals choose to listen to. This is a direct measure of mood that does not pre-specify certain mood-affecting events nor assume the extent of their impact on investors. We validate our music-based sentiment measure by correlating it with mood swings induced by seasonal factors, weather conditions, and COVID-related restrictions. We find that music sentiment is positively correlated with same-week equity market returns and negatively correlated with next-week returns, consistent with sentiment-induced temporary mispricing. Results also hold under a daily analysis and are stronger when trading restrictions limit arbitrage. Music sentiment also predicts increases in net mutual fund flows, and absolute sentiment precedes a rise in stock market volatility. It is negatively associated with government bond returns, consistent with a flight to safety.

Available on ECCH

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