Social Networks and Financial Markets
Paper Session
Friday, Jan. 5, 2024 2:30 PM - 4:30 PM (CST)
- Chair: Lin Peng, CUNY-Baruch College
Social Contagion and the Survival of Diverse Investment Styles
Abstract
We examine the contagion of investment ideas in a multiperiod setting in which investors are more likely to transmit their ideas to other investors after experiencing higher payoffs in one of two investment styles with different return distributions. We show that heterogeneous investment styles are able to coexist in the long run, implying a greater diversity than traditional theory predicts. We characterize the survival and popularity of styles in relation to the distribution of security returns. In addition, we demonstrate that psychological effects such as conformist preference can lead to oscillations and bubbles in the choice of style. These results offer empirically testable predictions, and provide new insights into the persistence of the wide range of investment strategies used by individual investors, hedge funds, and other professional portfolio managers.The Social Signal
Abstract
We examine social media attention and sentiment from three major platforms: Twitter, StockTwits, and Seeking Alpha. We find that, even after controlling for firm disclosures and news, attention is highly correlated across platforms, but sentiment is not: its first principal component explains little more variation than purely idiosyncratic sentiment. Using market events, we attribute differences across platforms to differences in users (e.g., professionals vs. novices) and differences in platform design (e.g., character limits in posts). We also find that sentiment and attention contain different return-relevant information. Sentiment predicts positive next-day returns, but attention predicts negative next-day returns. These results highlight the importance of distinguishing between social media sentiment and attention across different investor social media platforms. In the burgeoning social finance literature, nearly all papers examine single platforms; our paper cautions that attention-related results from these papers are more likely to generalize than results concerning sentiment.Social Ties, Comovements, and Predictable Returns
Abstract
We examine the relation between the social ties between firms' headquarters locations and co-movements between their fundamentals and stock returns. Our evidence indicates that firms in the same industry with socially connected locations exhibit co-movement in fundamentals and stock returns that exceed those without socially connected locations. However, the stock returns reflect the location information with a lag. To exploit this lagged relationship, we form portfolios that buy (sell) stocks when their socially-weighted industry peer returns in the previous month is high (low). The value-weighted version of this portfolio generates a monthly alpha of 84 basis points. Social peer firm returns also predict firms' future earnings surprises, analysts' forecast errors, and earnings announcement returns. Further evidence indicates that the mispricing is stronger for low-visibility firms and for firms located outside of industry clusters, and that the effect is not subsumed by other sources of return predictability.Discussant(s)
Albert S. Kyle
,
University of Maryland
Hongjun Yan
,
DePaul University
Alberto Rossi
,
Georgetown University
Gerard Hoberg
,
University of Southern California
JEL Classifications
- G4 - Behavioral Finance
- G1 - General Financial Markets