The role of media in the credit crunch: The case of the banking sector

Abstract

Using a Vector Autoregression framework, this paper investigates the dynamic relationship
\nbetween the intensity of negative media speculation and the market performance of
\nfinancial institutions. Evidence is provided that over the sub-prime crisis period pessimistic
\ncoverage Granger-caused the returns on banking indices, while causality in the opposite
\ndirection proved weaker. These findings may imply that journalists not only report on the
\nstate of economic reality, but also play an active role in creating it. Investors acting upon
\nsentiment implicit in media reports would have been able to improve their investment
\nperformance, as measured by Sharpe ratios and Jensen’s alphas.