How does the COVID-19 pandemic shape the relationship between Twitter sentiment and stock liquidity of US firms?

Abstract

Using a new investor sentiment metric derived from Twitter, this paper examines how the pandemic's death rate influences the impact of investor sentiment on stock liquidity. Recent literature remains inconclusive regarding the effect of COVID-19 information and investor sentiment on financial markets. Using panel smooth transition regression (PSTR) for daily data on 338 listed firms in the S&P500 from January 2, 2020, to May 26, 2021, the findings reveal that the impact of Twitter sentiment on stock liquidity is nonlinear and changes over time and across firms in the function of the pandemic's death rate in the US. The results exhibit a threshold level of 4.32%, above which investor sentiment boosts stock liquidity. The speed of the transition from low to high pandemic death rate regime occurred abruptly rather than smoothly. This translates to severe changes in investor perception and demonstrates that investors are rapidly updating their beliefs during the COVID-19 outbreak.