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Twitter Activity and Stock Returns

August 16, 2017 • Posted in Animal Spirits

Do changes in Twitter activity about a stock predict its future returns? In their July 2017 paper entitled “Is All that Twitters Gold? Social Media Attention and Stock Returns”, David Rakowski, Sara Shirley and Jeffrey Stark investigate whether Twitter activity: (1) drives noise trading by concentrating investor attention; and, (2) amplifies the effect of fundamental information in news releases. They identify tweets about a stock as those containing a dollar sign ($) before its ticker (such as $AAPL). They focus on daily (midnight-to-midnight) deseasonalized change in tweets, calculated as the residual from a regression on day-of-the-week and month-of-the-year dummy variables. They then test a trading strategy that each day:

  1. Ranks stocks into tenths (deciles) separately by prior-day change in tweets and market capitalization.
  2. At the next market open, takes equally weighted long (short) positions in stocks in both the top decile of change in tweets and the bottom decile of market capitalization (the bottom decile of change in tweets and the bottom decile of market capitalization).
  3. Liquidates positions at the next market close.
  4. Estimates a characteristic-adjusted open-to-close return by subtracting the return of a portfolio of stocks with similar market capitalizations and book-to-market values.

They restrict their sample to stocks in the Russell 3000 Index at some point during the sample period with: price over $5, at least 24 months of data and tweets on at least 10% of days. Using daily Twitter data, firm characteristics, news coverage and open-to-close returns for the specified sample of stocks during 2011 through 2015, they find that: (more…)

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