Abstract
We analyze the relation between stock market liquidity and real-time measures of sentiment obtained from the social-media platforms StockTwits and Twitter. Linear regression analysis shows that extreme sentiment corresponds to higher demand and lower supply of liquidity, with negative sentiment having a much larger effect on demand and supply than positive sentiment. An 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, we conduct a historical simulation of a market-neutral mean-reversion strategy that uses social-media information to determine its portfolio allocations. Our results suggest that the demand 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.
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