The Impact of Alternative Data and Social Media Sentiment on Stock Market Movements

Abstract

The paper advances through the alternative data function under a focus on social sentiment and the effect it has on the stock market performance. Financial analysis for traditional purposes relies on fundamental and technical indicators. However, the development of nontraditional data such as tweets, web traffic, and credit card purchases redefined the investors' decision-making process. In a company-specific tweet data, we consider their influence on the market volume of trade and stock prices. These results are compared with such benchmarks as the S&P 500 and Nasdaq.

Our evidence reveals that the tweets from prominent spokespeople for public figures can evoke significant short-term volatility regardless of the fundamentals. Small-cap companies appear especially sensitive, while large-cap companies record diluted responses. Our analysis finds that positive and negative sentiment on the internet mirrors stock price movements closely. It reaffirms that sentiment among investors and sentiment reported in real-time exerts enormous influence over financial markets.

These results also mirror the increased importance of alternative data for the modern-day investment process. As it creates new prospects for forecasting, it also carries related hazards which can't be assessed via traditional metrics for data.