Yale researchers examined the question of whether the words used by financial publications can spur analysts to forecast events such as a crash or recession, and found a correlation between word usage in The Wall Street Journal and forecasting ability, reports an article in MediaPost. The researchers, including PhD students Leland Bybee and finance professor Bryan T. Kelly, used software to scan hundreds of thousands of articles published by The Journal between 1984 and 2017, looking specifically at the relationship between the use of the word “recession” to changes in production.
The researchers found that when there was an increase in the use of the word “recession,” there was a 1.99% drop in industrial production about 17 months later, followed closely by a 0.92% dip in employment about 20 months later. That would indicate that an emphasis on the word recession gave analysts more forecasting ability, the article contends. And indeed, “attention to topics such as ‘recession’…could explain 25% of the variation in stock market returns,” according to an article in Yale Insights that details the study. Compared to a separate set of over 100 different economic measures that only showed a 9% correlation, The Wall Street Journal’s usage of the word “recession” could be much more impactful than previously known.