Academic work demonstrates for the first time how media narratives are capable of influencing market trends.
The American presidential election highlighted the gap between American political reality and the European media narrative. By narrative we mean an interpretation of historical events through a story. The question here is whether the biases of local media in their presentation of economic reality are likely to modify the choices of investors.
Nobel Prize winner Robert Shiller, famous author of “Irrational Exuberance” and analyst of “animal minds”, has already pioneered work in this field by publishing “Narrative Economics” in 2017. Today, for the first time, Academic work demonstrates that the media narrative does indeed significantly influence institutional investments, even after adjusting for economic fundamentals. The study is titled “Beyond the Fundamentals: How Media-Driven Narratives Influence Cross-Border Capital Flows,” by Isha Agarwal, Wentong Chen, and Eswar S. Prasad (published by NBER Working Paper No. 33159, November 2024) .
“This empirical work analyzes the narrative used in 1.5 million press articles published in 15 countries”
This empirical work analyzes the narrative using natural language in 1.5 million press articles published in 15 countries in a market where information is relatively opaque, namely China. The search for information on China is indeed complicated and costly for both the public and institutional investors.
The difficulty of following Chinese economic news has become more complicated recently and the latest trends are not favorable. A study by the Mercator Institute for China Studies, which is the largest European institute for analyzing China, with some 20 researchers, confirms this. “Obtaining crucial information about China digitally is under threat,” he writes. The author adds: “As the government is increasingly less willing to share information with the public, it is also asking third-party data providers to apply restrictions on foreign access.” And added: “Although the borders were reopened after the pandemic, the information sphere will not see a complete reopening.”
The weight of bad news
The list of media used by the research work published by the NBER includes the main American, British (without the FT), Indian, Singaporean or South African newspapers, but they are all in English. No trace of media from continental Europe or Japan. In terms of institutional investments, the authors use data concerning investment funds from the company Morningstar.
“The influence of the media narrative is all the more marked when investors are less familiar with China.”
The influence of the media narrative is all the more marked when investors are less familiar with China or do not have privileged access.
In a media market marked by significant political biases, the authors reveal that “political and environmental narrative influences flows as much, if not more, than economic narratives, suggesting that the marginal value of narratives increases when reliable information on the market are rare.
The authors also demonstrate an asymmetry in the reaction of investors. Institutional investors react more to bad news than to positive information about China.
For investors, this original research paves the way for improving investment strategies by avoiding excessive reliance on local media before investing in a particular market. The authors suggest reducing media bias from investors’ places of origin by, for example, translating information from the target country.
