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The study, published in August 2021, looked at positivity in the songs of the daily top 200 in 40 countries as a measure of mood in its citizens.
It found that an increase in positive music sentiment was associated to a higher return in the stock market for that week and a lower return for the next week.
Returns are measured in basis points, a percentage change in price of stocks.
The study introduces the idea that the kind of music investors are listening to at a given moment is a reflection of their mood and influences what stocks they choose to trade. It acknowledges that it is making the assumption that people listen to music that reflects the mood they are currently experiencing, rather than listening to change their mood.
The researchers controlled for past returns, the world market return, seasonalities, weather conditions and other variables that could impact a country’s mood.
The study also found that bigger changes in people’s musical sentiment was correlated with larger volatility in the stock market.
Lastly, the study investigated music sentiment’s association with net equity fund flows and government bond index returns. Net equity fund flows are a measure of how much cash is flowing in and out of financial assets.
More positive music was correlated with more cash flowing in and out of financial assets. More negative music correlated with more returns from government bonds, which investors typically flock to to minimize risk, according to the study.
Alex Edmans, professor of finance at the London Business School and co-author of the paper, told USA TODAY that the goal was to displace the theory that markets are efficient and show that investor sentiment has an impact on market trends.
“We chose to look at this question because many people believe that markets are efficient – this isn’t just an academic theory, but something that many people believe holds in practice too, as evidenced by the substantial rise in index funds. We wanted to show that markets are inefficient as they respond to sentiment,” Edmans told USA TODAY.
The index funds Edmans mentions are essentially a basket of stocks and bonds representing a slice of the stock market and are often used to curtail the emotional component of investing by making the investor more passive in the process, says the U.S. Securities and Exchange Commission.
Michelle Shen is a Money & Tech Digital Reporter for USA TODAY. You can reach her @michelle_shen10 on Twitter.