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News Entropy

27 Pages Posted: 7 Apr 2021

See all articles by Nikolas Kuhlen

Nikolas Kuhlen

University of Cambridge - Faculty of Economics; The Alan Turing
Institute

Andrew Preston

University College London - Department of Economics

Date Written: October 1, 2020

Abstract

We introduce the concept of 'news entropy' to characterise the
relationship between news coverage and the economy. Intuitively, news
entropy decreases as the news focus on a smaller set of pressing
topics. We observe that news entropy exhibits clear negative spikes
close to important economic, financial, and political events.
Investigating the effect of changes in news entropy, we find that
decreases are associated with two key features: an increase in
uncertainty measures and a macroeconomic contraction. The variable is
priced in the cross-section of stock returns and low news entropy is
associated with increased stock price volatility at the firm level.

Keywords: text analysis, news, local projections, asset pricing,
firm-level volatility, entropy, machine learning

JEL Classification: C43, D80, E32, G12

Suggested Citation: Suggested Citation

Kuhlen, Nikolas and Preston, Andrew, News Entropy (October 1, 2020).
Available at SSRN: https://ssrn.com/abstract=3820449 or http://
dx.doi.org/10.2139/ssrn.3820449
 

Nikolas Kuhlen (Contact Author)

University of Cambridge - Faculty of Economics ( email )

Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom

The Alan Turing Institute ( email )

British Library
96 Euston Road
London, NW1 2DB
United Kingdom

Andrew Preston

University College London - Department of Economics ( email )

Drayton House, 30 Gordon Street
30 Gordon Street
London, WC1H 0AX
United Kingdom

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