The financial press is a conduit for popular narratives that reflect collective memory about historical events. Some collective memories relate to major stock market crashes, and investors may rely on associated narratives, or “crash narratives,” to inform current beliefs and choices. Using recent advances in computational linguistics, we develop a higher-order measure of narrativity based on newspaper articles that appear following major crashes. We provide evidence that crash narratives propagate broadly once they appear in news articles, and significantly explain predictive variation in market volatility. We exploit investor heterogeneity using survey data to distinguish the effects of narrativity and fundamental conditions and find consistent evidence. Finally, we develop a measure of pure narrativity to examine when the financial press is more likely to employ narratives.
We thank Milad Nozari for valuable support. We thank participants in seminars in Erasmus University, University of Amsterdam, and Seoul National University for valuable comments. We thank the International Center for Finance at the Yale School of Management for support. The opinions expressed are those of the authors and do not necessarily reflect those of the Office of Financial Research, the U.S. Department of the Treasury, or the National Bureau of Economic Research.