The media effect theory assesses how media coverage influences investors, borrowers, and consumers in the mortgage industry and stock market, including the effect of social media. It can cause abnormal changes in stock prices and affect consumer spending and investment behavior.
The media effect is a financial theory that assesses how media coverage of an issue influences investors, borrowers, and consumers. It is applied to the mortgage industry and stock market activity, and measures the effect of major news stories on spending, refinancing, and investing. Often called behavioral finance, the theory appears to apply internationally and includes the effect of social media.
One of the most visible trends in the media effect occurs in the mortgage industry. When the mainstream media reports on declining interest rates, it usually triggers a wave of homeowners refinancing their loans. The hedge also increases borrowers’ prepayment rate when prominent interest rate stories appear.
Financial markets can also be influenced by the effect of the media. It is based on the premise that individual investors are influenced by the information they receive, whether or not the information is justified or rational. This could explain abnormal changes in stock market prices that cannot be rationalized through historical performance or analytical theories.
Studies have shown that trading volume commonly increases after media reports about a particular industry or corporation reach investors. This could influence the stock price in a certain area by causing over-buying or over-selling. Stock market activity in a particular news-linked sector can occur regardless of the actual value of the shares.
The headline effect represents another theory related to the media effect and is based on negative news articles. If a business or a certain segment of the economy receives negative press coverage, it could affect how consumers spend and how willing they are to invest. An example of this phenomenon centers on stories about minor increases in gas prices. Studies show that these news articles can force consumers to cut spending in other areas.
The Social Media Effect looks at how news spread over the Internet impacts stock prices and trading activity. One study examined social networking sites and blogs to measure the number of times a certain head of a large corporation was mentioned after announcing an illness. The analysis found a correlation between the effect of social media and changes in corporate share prices.
The effect of the media and its influence on financial behavior seem to apply internationally. The University of Hong Kong conducted a study in 2009 that revealed that when people’s attitudes change, it leads to behavioral changes in financial matters. By surveying 300 investors, the study discovered a connection between investor behavior and the media reports that study participants had been exposed to.
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