Economic News, Social Media Sentiments, and Stock Returns: Which Is a Bigger Driver?

This study provides empirical evidence on the relative impact of innovations in information content and noise embedded in economic news and social media sentiments on DJIA, S&P 500, NASDAQ, and Russell 2000 index returns. We find that economic news sentiments are relatively more rational and have a greater impact than irrational social media sentiments. There exist significant negative effects of three distinct categories of social media sentiments and a significant positive impact of economic news sentiments on stock returns. The magnitude of the impact of the economic news sentiments is larger. In addition, the economic news sentiments seem to have greater information content and are driven by risk factors to a greater extent than the sentiments of social media, which probably contain more noise. There are significant negative responses of stock returns to irrational components of social media sentiments while significant positive responses to rational components of economic news sentiments. Lastly, the magnitude of the impact of rational economic news sentiments is higher than that of irrational social media sentiments. Our results are consistent with the view that business news is a manifestation of a rational outlook to a larger extent than social media and can drive stock valuations. [ABSTRACT FROM AUTHOR]