Climate Risk and Commodity Currencies
with Leif Anders Thorsrud and Felix Kapfhammer.
The positive relationship between real exchange rates and natural resource income is well understood and studied. However, climate change and the transition to a lower-carbon economy now challenges this relationship. We document this by proposing a novel news-media-based measure of climate change transition risk, and show that when such risk is high, major commodity currencies experience a persistent depreciation and the relationship between commodity price fluctuations and currencies tends to become weaker.
Business cycle narratives
with Leif Anders Thorsrud.
This article quantifies the epidemiology of media narratives relevant to business cycles in the US, Japan, and Europe (euro area). We do so by first constructing daily business cycle indexes computed on the basis of the news topics the media writes about. At a broad level, the most important news narratives are shown to be associated with general macroeconomic developments, finance, and (geo-)politics. However, a vast set of narratives contributes to our index estimates across time, especially in times of expansion. In times of trouble, narratives associated with economic fluctuations become more sparse. Likewise, we show that narratives do go viral, but mostly so when growth is low. While narratives interact in complicated ways, we document that some are clearly associated with economic fundamentals. Other narratives, on the other hand, show no such relationship, and are likely better explained by classical work capturing the market’s animal spirits.
Asset returns, news topics, and media effects (R&R: The Scandinavian Journal of Economics)
with Leif Anders Thorsrud.
We decompose the textual data in a daily Norwegian business newspaper into news topics and investigate their predictive and causal role for asset prices. Our three main findings are: (1) a one unit innovation in the news topics predict roughly a 1 percentage point increase in close-to-open returns and significant continuation patterns peaking at 4 percentage points after 15 business days, with little sign of reversal; (2) simple zero-cost news-based investment strategies yield significant annualized risk-adjusted returns of up to 20 percent; and (3) during a media shortage, due to an exogenous strike, returns for firms particularly exposed to our news measure experience a substantial fall. Our estimates suggest that between 20 to 40 percent of the news topics’ predictive power is due to the causal media effect. Together these findings lend strong support for a rational attention view where the media alleviate information frictions and disseminate fundamental information to a large population of investors.