The Effect of Social and News Media Sentiments on Financial Markets

Abstract

As new technologies continue to push towards democratization of knowledge, various platforms have been vying to become the premiere source of knowledge in this knowledge driven economy. At one end, we have online discussion forums morphing into social media platforms, where retail investors flock to seek and share their opinions about financial markets, a classical example of a self-sustainable knowledge factory, where community generates and consumes the knowledge. On the other end, we have news media platforms, fighting to maintain their status as premier knowledge sources, touting domain experts as their contributors. This research compares the effect of these two knowledge sources on financial markets. We use text mining methods to capture the sentiments revealed on the most popular stock discussion forum (HotCopper) and a very popular news media platform (Google Finance) in Australia. We find that both of sentiments from social media and news media predict future stock returns at the individual firm level. But the effect of social media appears to stronger and long lasting compared to news media.