Uncovering the relationship between incidental emotion toward a disaster and stock market fluctuations: Evidence from the US market

• Published in: Decision Support Systems Vol. 181; p. 114213
• Main Authors: Yang, Tao, Yu, T. Robert, Zhao, Huimin
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01-06-2024
• Subjects: BERTweet; COVID-19; Emotion-decision theory; Equity market; Incidental emotion; Sentiment analysis; COVID-19; Sentiment analysis; Incidental emotion; Emotion-decision theory; BERTweet; Equity market
• ISSN: 0167-9236
• DOI: 10.1016/j.dss.2024.114213

Despite having potentially important implications, there has been little research on the relationship between the public's incidental emotion and the stock market. To that end, we construct a valence-based measure of incidental emotion using BERTweet's sentiment analysis and empirically investigate the association between collective incidental emotion toward the COVID-19 pandemic and the U.S. stock market. We employ multivariate time series autoregressive models to test the relationship between emotion polarity and stock market returns or trading volumes. The results reveal that societal sentiment toward the pandemic has a significant effect on the returns of the Dow Jones Industrial Average and S&P 500. In contrast, the macro-level emotion does not significantly affect the return for NASDAQ 100. The findings also suggest a significant association between incidental emotion and trading volumes. We conduct a battery of sensitivity tests that further support our conjecture. The study underscores the robust role of incidental emotion in investment decision-making, highlighting its significance as a distinctive feature that should be incorporated into financial decision support systems.
•An investment decision framework based on the emotion-decision theory.•We find a carryover effect of emotion toward COVID-19 on the US stock market.•Collective incidental emotion influences investment decisions during disasters.•It is vital to consider collective emotion in studying disasters' impacts.