Do Investors Read Too Much into News? How News Sentiment Causes Price Formation

It is a well-known fact that financial markets react to information. Even though this relationship seems simple, finding evidence is not easy since information is embedded in textual news releases. Only recent have researchers started to look at the content of news. Interestingly, previous work avoids the inference of a causal relationship between news messages and abnormal returns. In this paper, we concentrate on the oil market from which we identify a (strong) instrument, namely, the number of terroristic attacks, and can reasonably account for the endogeneity problem associated with news releases. In addition, we study how news releases affect stock prices temporally. Thus, we find that a change in news sentiment entails a large change in oil prices.