Social Media, News Media and the Stock Market

Abstract

We study the effect on stock volatility and turnover of coverage by traditional news media and social media. We find that coverage by traditional news media predicts decreases in subsequent volatility and turnover, but coverage by social media predicts increases in volatility and turnover. These patterns are inconsistent with rational models where social and news media both convey information. We show that they are consistent with a model of “echo chambers”, where social networks repeat news, but some investors interpret repeated signals as genuinely new information.

JEL Classification: G02, G12, G14