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Working Paper
Replicating Business Cycles and Asset Returns with Sentiment and Low Risk Aversion
This paper develops a real business cycle model with eight fundamental shocks andone ìequity sentiment shockî that captures belief-driven áuctuations. I solve for thetime series of shock realizations that allow the model to exactly replicate the observedtime paths of U.S. macroeconomic variables and asset returns over the past six decades.The representative agentís perception that movements in equity value are partly drivenby sentiment is close to self-fulÖlling. The model-identiÖed sentiment shock is stronglycorrelated with other fundamental shocks and implies ìpessimismîrelative to ...
Working Paper
Clouded Judgment: The Role of Sentiment in Credit Origination
Using daily fluctuations in local sunshine as an instrument for sentiment, we study its effect on day-today decisions of lower-level financial officers. Positive sentiment is associated with higher credit approvals, and negative sentiment has the opposite effect of a larger magnitude. These effects are stronger when financial decisions require more discretion, when reviews are less automated, and when capital constraints are less binding. The variation in approval rates affects ex-post financial performance and produces significant real effects. Our analysis of the economic channels suggests ...
Working Paper
The FOMC versus the Staff: Do Policymakers Add Value in Their Tales?
Using close to 40 years of textual data from FOMC transcripts and the Federal Reserve staff's Greenbook/Tealbook, we extend Romer and Romer (2008) to test if the FOMC adds information relative to its staff forecasts not via its own quantitative forecasts but via its words. We use methods from natural language processing to extract from both types of document text-based forecasts that capture attentiveness to and sentiment about the macroeconomy. We test whether these text-based forecasts provide value-added in explaining the distribution of outcomes for GDP growth, the unemployment rate, and ...
Working Paper
Real Business Cycles, Animal Spirits, and Stock Market Valuation
This paper develops a real business cycle model with five types of fundamental shocks and one "equity sentiment shock" that captures animal spirits-driven fluctuations. The representative agent's perception that movements in equity value are partly driven by sentiment turns out to be close to self-fulfilling. I solve for the sequences of shock realizations that allow the model to exactly replicate the observed time paths of U.S. consumption, investment, hours worked, the stock of physical capital, capital's share of income, and the S&P 500 market value from 1960.Q1 onwards. The ...
Working Paper
Effects of Information Overload on Financial Markets: How Much Is Too Much?
Motivated by cognitive theories verifying that investors have limited capacity to process information, we study the effects of information overload on stock market dynamics. We construct an information overload index using textual analysis tools on daily data from The New York Times since 1885. We structure our empirical analysis around a discrete-time learning model, which links information overload with asset prices and trading volume when investors are attention constrained. We find that our index is associated with lower trading volume and predicts higher market returns for up to 18 ...
Briefing
Introducing the Credit Market Sentiment Index
In a forthcoming paper, we develop a new signal-extraction statistical model to estimate a factor summarizing conditions in U.S. credit markets. The factor provides a real-time gauge of "sentiment" in credit markets, above and beyond that attributable to contemporaneous economic conditions. Fluctuations in the credit market sentiment factor are associated with strong asymmetric and nonlinear effects on economic activity, depending not only on the magnitude and sign of a credit market sentiment shock but also on the current economic conditions.
Journal Article
Regional Economic Sentiment: Constructing Quantitative Estimates from the Beige Book and Testing Their Ability to Forecast Recessions
We use natural language processing methods to quantify the sentiment expressed in the Federal Reserve's anecdotal summaries of current economic conditions in the national and 12 Federal Reserve District-level economies as published eight times per year in the Beige Book since 1970. We document that both national and District-level economic sentiment tend to rise and fall with the US business cycle. But economic sentiment is extremely heterogeneous across Districts, and we find that national economic sentiment is not always the simple aggregation of District-level sentiment. We show that the ...
Journal Article
Sentiment Analysis of the Fifth District Manufacturing and Service Surveys
This article uses basic text analytic techniques to examine the sentiment embodied in two surveys conducted by the Richmond Fed: the Manufacturing and Service Sector Surveys. Specifically, the article develops several sentiment indicators based on the comments provided by survey participants, contrasts the sentiment measures against responses to other survey questions, and analyzes the monthly evolution of the sentiment indicators during the period 2002-18. Two main conclusions emerge from the analysis. First, the indicators reflect reasonably well changes in economic sentiment along time. ...
Journal Article
Why Are Multifamily Property Prices Falling?
Multifamily property prices climbed to record levels in recent years amid low interest rates and surging housing demand. More recently, prices have retreated in the face of higher interest rates, slower rent growth, elevated operating expenses, and increased delivery of new units available for rent. However, the deterioration in these fundamentals does not fully explain recent property price declines, suggesting investors’ near-term outlooks have been pessimistic.