The Impact Of News Sentiment On The "Idiosyncratic Volatility Puzzle" Of China’s A-share Market

In traditional financial theory,high risk usually requires high return to compensate,so there is no positive correlation between idiosyncratic risk and asset returns that can be diversified by portfolio construction.However,in recent years,a negative correlation between idiosyncratic volatility,a proxy variable for idiosyncratic risk,and expected returns has been found in studies based on both Western capital markets and emerging markets.Since this phenomenon is not in line with the traditional financial theory,it is an anomaly in the financial market and has been named the "idiosyncratic volatility puzzle".Many studies have been conducted on the causes of this financial anomaly,and many factors,including short-selling restrictions and investor irrationality,have been found to explain the "idiosyncratic volatility puzzle" to some extent.News has become an important basis for investors to make investment decisions due to its high authority and wide distribution,and news reports are inevitably emotionally oriented,so news sentiment may influence investor behavior and thus the stock market.Accordingly,this paper investigates the existence of the "idiosyncratic volatility puzzle" by taking the listed A-share companies on the Shanghai and Shenzhen main boards from 2012 to 2021 as the research object,and constructs a news sentiment indicator related to individual stocks using the recently popular natural language processing model BERT.The study shows that:(1)there is a "idiosyncratic volatility puzzle" in the Chinese A-share market.(2)News sentiment can influence the "idiosyncratic volatility puzzle".(3)Positive sentiment can exacerbate the "idiosyncratic volatility puzzle" to a certain extent,while negative sentiment can weaken the "idiosyncratic volatility puzzle".The contributions of this paper are threefold: First,in constructing news sentiment indicators,this paper uses BERT,the most popular natural language processing model for news sentiment determination today.Second,compared with the previous literature,this paper directly investigates the impact of news sentiment on the "idiosyncratic volatility puzzle",which expands the research on the "idiosyncratic volatility puzzle" and,to a certain extent,the research on the impact of news on the market.Third,we ranked and grouped the positive news that would aggravate the anomalies according to the magnitude of the sentiment indicators,and observed the impact of different positive news on the "idiosyncratic volatility puzzle",so as to raise the attention of the relevant departments to the standardization of news release.