Forecast Direct No.34 - Social Media and Finance

In this episode of the Forecast Direct, Thomas Ash of the UCLA Anderson Forecast talks to Professor Tony Cookson of the University of Colorado, Boulder, Leeds School of Business. They discuss the finance social media ecosystem, what it is, how it functions, and some key research findings related to it. This is especially important as social media takes a larger share of attention away from traditional media.

Key takeaways:

* Key social media platforms for finance include StockTwits, Twitter (“FinTwit”), and Seeking Alpha. On these roughly 80% of posts are bullish and coverage even includes many tiny to mid‑cap firms. By contrast, traditional media outlets show more negative‑tilted information and skew toward large firms.

* A useful way to characterize different parts of social media research is where it can act as a lens to view typical human behavior, versus social media's role as a participant, itself driving trading and volatility.

* There is a difference between firm‑Level vs. market‑level signals on social media. Different social media platforms talk about the same things but tend to disagree on the prospects of individual firms. At the firm level, spikes in social‑media sentiment mildly predict positive returns, while attention spikes tend to predict negative returns. At the aggregated market‑level however the opposite is true for both sentiment and attention, pointing to key differences between the firm and market level signals.

* Echo‑chamber dynamics and fake‑news proliferation can degrade both the quality of information impounded into prices and investors’ trust in genuine signals.