Can a 280-character message explain stock returns?: evidence from the JSE
Date
2021
Authors
Nyakurukwa, Kingstone
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Abstract
Online stock forums have emerged as an essential investing platform where multiple users can
share their opinions about financial markets. This study examines the association between tweet
features (bullishness, message volume and investor agreement) and market features (stock returns,
trading volume and volatility) using 158 South African companies and a dataset of firm-level
Twitter and StockTwits messages extracted from Bloomberg for the period 1 January 2015 to 31
December 2019. Firstly, the results from the study show that there is a general contemporaneous
association between tweet features and stock market features. Secondly, no monotonic relationship
is found between the magnitude of tweet features and the magnitude of market features. The
coefficients of tweet features are found to be stronger in absolute terms at the extreme quantiles of
returns. The BDS tests confirm the nonlinear relationship between stock returns and tweet features
which implies that the relationship should be modelled using nonlinear specifications. Thirdly, the
study finds no evidence that past values of tweet features can predict forthcoming stock returns
using daily data. However, analysis using weekly and monthly data shows that past values of tweet
features contain useful content that can predict the future values of stock returns. This implies that
policymakers must implement appropriate regulations to deter the development of bubbles or
crashes during the cycles of “greed” and “fear”. The lack of causal effects between tweet features
and market features at the daily frequency implies that the JSE is dominated by institutional
investors who are not driven by sentiment. The findings from the study corroborate the findings
from previous studies which confirmed the dynamic nature of efficiency on the JSE.
Description
A research report submitted in fulfilment of the requirements for the
degree of Master of Commerce (50% research) in Finance to the Faculty of Commerce, Law
and Management, School of Economics and Finance, University of the Witwatersrand, Johannesburg, 2021