Volatile relation between Stocks and Twitter, Facebook

On 1^st May 2020, Tesla’s co-founder and CEO Elon Musk tweeted- “Tesla stock price is too high imo” leading Tesla to lose US$14 million in valuation in just a few hours. Elon Musk’s personal stake went down by about US$3  billion following this tweet – and this isn’t the first time Musk has tweeted or given statements about his business on social media.

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It can be said that there is a very complicated yet simple relationship between the well-known micro-blogging platform Twitter and financial markets. The technological revolution and the omnipresence of computers and internet connection has led to flooding of data, changing the way we look at social and economic sciences.

Since the past few years, Twitter – a favourite social media website has become extremely popular for financial forecasting and speculation. In 2018, Elon Musk tweeted that he was thinking about taking the company private. And what next? It cost him his role as chairman! “Am considering taking Tesla private at US$420. Funding secured,” he tweeted in August 2018 ,  as a result of which Tesla’s stock price increased by more than 6 % and closing at 10.98 % compared to the previous day. A federal judge even commented that Musk and Tesla should face a lawsuit filed by the shareholders regarding this tweet. SEC noted that Musk hadn’t discussed key deal terms, price etc. with any potential funding source much less confirmed. It was virtually believed that he could take Tesla private at a purchase price that reflected a premium over its stock’s then current price.

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In a paper- “Twitter and its relationship with returns and trading volume of European stocks” by Elodie Michaux, it was found that there is a fairly strong negative correlation between positive and negative tweets. An increase in the percentage of positive tweets proposes a decrease in the negative tweet percentage. A bigger volume of messages is also a factor. Likelihood of negative tweets having more visibility and impact as compared to the positive ones is more as tweet volume and negative emotion are better correlated than tweet volume and positive emotions. It has also been observed that negative messages tend to be retweeted and replied often than the positive ones and hence go viral rapidly. If the percentage of positive tweets rises, the number of retweets is most likely to fall. People are also more likely to retweet negative information than the positive ones.

Leveraging social media in forecasting is now an active area of research. It has been observed that company-initiated news on Twitter often leads to increased liquidity of that company, and it is especially true for small-cap firms that come under the radar of big houses.

We all know that US President Donald Trump is famous for his Twitter posts. In Dec 12, 2016, when the President tweeted about high cost in Lockheed Martin’s projects, the stock took a hit of 5 % immediately after. Let’s take a look at a few examples of the effect of Trump’s tweets on the share prices –

source- http://www.ijrar.org/papers/IJRAR190I005.pdf

Manipulation on social media and misuse

On April 23, 2013, Associated Press falsely tweeted about an explosion in the White House as its account was hacked, leading to a crash in S&P and Dow Jones. This shows that Social Media is not immune to manipulation and false rumors. Such instances are more common for individual stocks, especially small caps.

In India..

Since 2018, SEBI- the market regulator in India, also stepped up its efforts to curb rumour mongering on Twitter and other social media sites. With humongous data, algorithms are becoming more and more sophisticated to handle such cases. Social media platforms like Twitter have a widespread reach to the public. And this widespread reach has been increasing rapidly over the years and is expected to grow in future.

Social Media Impact on Stock Prices