When news travels: The role of sentiment in CME Nikkei futures returns

There is a well-established relationship between sentiment and financial market returns. We focus on the sentiment-return association for CME Nikkei futures, US-traded futures with a Japanese underlying asset. Using a unique dataset of news published in English and Japanese languages, we establish measures of ‘fundamental sentiment’ related to the underlying Japanese stocks, and ‘local sentiment’ for US stocks trading in the same timezone as the major futures traders. Our empirical results demonstrate that news in diverse languages is important. ‘Fundamental sentiment’ related to the underlying stocks is most salient for futures returns. However, ‘local sentiment’ plays a significant role during recession and in the distribution tail. This emphasizes the importance of economic agents considering news from multiple sources when making decisions. • We examine the relationship between news sentiment and returns for the CME’s Nikkei futures. • 'Fundamental sentiment' arises from news on underlying Japanese stocks, while 'local sentiment' relates to US-focused news. • ‘Fundamental sentiment’ from Japanese language articles is significant during Japanese recession and Abenomics. • Otherwise, ‘fundamental sentiment’ from English language articles dominates. • ‘Local sentiment’ is only important in the tails of the return distribution and certain economic conditions.