Crash Narratives
Narratives can serve as linguistic mechanisms for transmitting knowledge about important historical events. Shiller (2017) argues that narratives are potent mechanisms for the propagation of beliefs about the economy. We use a controlled context approach to test the effect of media narratives about historic stock market crashes on current investor beliefs and choices. Our methodology avoids the problem of large language model leakage that can lead to look-ahead biases. We find that crash narratives propagate broadly once they appear in news articles, and that they predict market volatility. We exploit investor heterogeneity using survey data to distinguish the effects of narrativity from response to fundamental factors. Finally, we develop a measure of pure narrativity to examine when the financial press is more likely to employ narratives.
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