Anyone who has a keen interest in the financial or stock markets may have witnessed that when old news about the market is posted on Twitter, investors react to it as if the news is fresh. A number of researchers at the Oxford University have found that the trend is prevalent and when old news hit Twitter, there is an increase in volatility in the financial markets. The study that has been undertaken by the researchers show by how much the investors are affected with old news. They have been able to compare the response of the financial markets to signals that are being generated based entirely on the news gathered from the social media.
If there is a social buzz about a particular stock, then the volatility in the market goes up by up to 50 percent. The trading volume also increases by up to 25 percent. When compared with traditional media such as magazines and newspapers, the average volatility for the heavily covered stocks are less.
The researchers have found a huge and significant difference between the impact that news in traditional news media has and news on social media has. The volatility of a particular stock that is mentioned on Twitter climbs not for a few days, but at least for a month. The effects can be detected even after a month, said one of the researchers. The data that has been compiled by the study so far show that the stocks that have been most talked about on social media increases in volatility up more than 50 percent of the average and the trading volume also goes up by 25 percent than the average.
The study that has been titled “Social Media, News Media and the Stock Market” makes use of a metric that is able to quantify the news coverage for specific stocks. the role that social media is playing in the stock market is rapidly increasing. According to the authors of the paper, Facebook has more than 1.8 billion uses and on average 500 millions tweets are made each day.
The first time that ‘stale news’ issue was identified was in 2007. According to the paper written by Paul Tetlock, the overreaction of investors about the stale news put pressure on the price of assets. This is an example of the incapability of the market to process data efficiently. According to the researchers, when investors take information from social media, they mainly end up making the wrong decisions.