The Social Media Risk Premium

Abstract

We show that social media risk is priced in the cross sections of stocks and bonds. New social media stock and bond factors earn annual premiums of 7.2% and 3.3%, respectively. Their contributions to explaining the cross-section are significant when tested both with classical and recent machine-learning asset-pricing methodologies. The social media risk premium is higher when market uncertainty is higher and sentiment is lower. Unlike other risk factors, the social media factor origins are clearly identified: prior to the age of social media their premiums did not exist.

Keywords: Social media risk factor, cross-section of stocks and bonds, machine learning, Twitter.

JEL Classification: G11, G12, G14