Text analysis in economics

Details

Supervisors

Monti, Francesca

Faculty

Faculté des sciences économiques, sociales, politiques et de communication

Degree label

Master [120] en sciences économiques, orientation économétrie, à finalité approfondie

Abstract

In today’s interconnected financial markets, central bank communications play a crucial role in influencing investor sentiment and driving market behavior. This essay explores the relationship between the sentiment embedded in central bank speeches and the performance of key stock indices, specifically the S&P 500 and Dow Jones Industrial Average (DJIA). By employing advanced text analysis techniques, including the Loughran and McDonald Financial Sentiment Dictionary and Term Frequency-Inverse Document Frequency (TF-IDF) weighting, this study quantifies the sentiment within these speeches and examines its impact on market movements. The analysis is conducted using three distinct models. First, sentiment scores are incorporated into regression models to evaluate their direct influence on stock returns. Second, a time series analysis is employed to model the sentiment scores themselves using Autoregressive Moving Average (ARMA) techniques, offering a predictive perspective on future central bank communications. Lastly, a multiple regression and a lagged regression model is developed to capture the delayed effects of sentiment on the S&P500 and DJIA respectivly, acknowledging that market reactions to central bank rhetoric may not be immediate. The findings reveal a moderate but significant correlation between the sentiment expressed in central bank speeches and subsequent movements in stock indices. Diagnostic tests highlight some challenges, such as mild autocorrelation and heteroscedasticity, which are addressed within the analysis. The inclusion of the lagged model provides additional insights into how delayed market responses to central bank communications can influence overall market dynamics. This research contributes to a deeper understanding of how central bank rhetoric shapes market sentiment and financial outcomes, offering valuable implications for both market participants and policymakers. By integrating multiple analytical approaches, the study provides a comprehensive examination of the complex interplay between monetary policy communication and stock market performance.