The “Sixth” Factor—<i>A Social Media Factor Derived Directly from Tweet Sentiments</i>

Abstract

Institutional investors may have an unclear understanding of the role of social media in asset price determination. Although some of the top quant hedge funds use crowd-based information gleaned from tweets, this relationship may be opaque to the rest of our community. In this article, the authors attempt to clarify the confusion regarding social media sentiment and security return behavior. They show that, surprisingly, Tweet sentiments have significant power in explaining the time-series contemporaneous variation in daily stock returns, even in the presence of well-known equity factors. By examining direct tweet sentiments as provided by StockTwits, the authors claim to have identified a <i>Social Media Factor</i>, the “sixth” factor, and they highlight the distinctions vis-à-vis Fama–French’s factors. <b>TOPICS:</b>Security analysis and valuation, quantitative methods, analysis of individual factors/risk premia