Wisdom of crowds before the 2007–2009 global financial crisis

Michael Chau, Chih-Yung Lin*, Tse Chun Lin

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

12 Scopus citations

Abstract

Our paper examines whether investor opinions expressed in social media predicted stock returns of financial firms during the 2007–2009 global financial crisis. We conduct a textual analysis of the articles published on the stock market insight website Seeking Alpha before the crisis and find that banks that were described in articles with a higher fraction of negative words experienced (1) sharper drops in stock prices, (2) larger increases in expected default probability, and (3) greater surges in nonperforming loans during the crisis. Our evidence suggests that wisdom of crowds provides valuable information on how banks weather a forthcoming crisis.

Original languageAmerican English
Article number100741
JournalJournal of Financial Stability
Volume48
DOIs
StatePublished - Jun 2020

Keywords

  • Financial crisis
  • Predictability
  • Seeking alpha
  • Social media
  • Textual analysis

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