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Momentum, Mean-Reversion, and Social Media: Evidence from StockTwits and Twitter

Shreyash Agrawal, Pablo D. Azar, Andrew W. Lo and Taranjit Singh
The Journal of Portfolio Management Summer 2018, 44 (7) 85-95; DOI: https://doi.org/10.3905/jpm.2018.44.7.085
Shreyash Agrawal
is a research affiliate at the MIT Laboratory for Financial Engineering in Cambridge, MA
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Pablo D. Azar
is a research affiliate at the MIT Laboratory for Financial Engineering in Cambridge, MA
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Andrew W. Lo
is the Charles E. and Susan T. Harris Professor at the MIT Sloan School of Management, director of the Laboratory for Financial Engineering, and principal investigator at the Computer Science and Artificial Intelligence Laboratory in Cambridge, MA
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Taranjit Singh
is a research affiliate at the MIT Laboratory for Financial Engineering in Cambridge, MA
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Abstract

In this article, the authors analyze the relation between stock market liquidity and real-time measures of sentiment obtained from the social-media platforms StockTwits and Twitter. The authors find that extreme sentiment corresponds to higher demand for and lower supply of liquidity, with negative sentiment having a much larger effect on demand and supply than positive sentiment. Their intraday event study shows that booms and panics end when bullish and bearish sentiment reach extreme levels, respectively. After extreme sentiment, prices become more mean-reverting and spreads narrow. To quantify the magnitudes of these effects, the authors conduct a historical simulation of a market-neutral mean-reversion strategy that uses social-media information to determine its portfolio allocations. These results suggest that the demand for and supply of liquidity are influenced by investor sentiment and that market makers who can keep their transaction costs to a minimum are able to profit by using extreme bullish and bearish emotions in social media as a real-time barometer for the end of momentum and a return to mean reversion.

TOPICS: Security analysis and valuation, statistical methods

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The Journal of Portfolio Management: 44 (7)
The Journal of Portfolio Management
Vol. 44, Issue 7
Summer 2018
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Momentum, Mean-Reversion, and Social Media: Evidence from StockTwits and Twitter
Shreyash Agrawal, Pablo D. Azar, Andrew W. Lo, Taranjit Singh
The Journal of Portfolio Management Jul 2018, 44 (7) 85-95; DOI: 10.3905/jpm.2018.44.7.085

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Momentum, Mean-Reversion, and Social Media: Evidence from StockTwits and Twitter
Shreyash Agrawal, Pablo D. Azar, Andrew W. Lo, Taranjit Singh
The Journal of Portfolio Management Jul 2018, 44 (7) 85-95; DOI: 10.3905/jpm.2018.44.7.085
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    • RELATED WORK
    • DATA AND VARIABLES
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    • EVENT STUDY ANALYSIS
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