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Posted December 23, 2020 at 10:25 am
The post “Do Individual Investors Trade on Investment-related Internet Postings?” first appeared on Alpha Architect Blog.
We have written in the past about the links between social media, investing and future stock returns ( here, here, and have a full chapter covering the topic in our book). As we turn to social media for our friendships, entertainment, confirmation bias, and news, it’s little surprise that active traders would begin using it as a potential source of sentiment information and/or as a way to ‘talk their book.’ That investors are turning to these new sources for information isn’t particularly shocking, however, these developments may become more informative going forward as smaller investors have been re-entering the market. In this paper, the authors ask:
The research team analyzed a leading European social trading platform, the sample is made up of about 30,000 comments from traders with replicating transactions of followers, which amounts to €234 million over the time period from January 2013 to December 2014, the authors find:
The authors perform a number of robustness checks confirming the results.
Investors hunting for an edge will turn anywhere and the less sophisticated investor can be convinced that they “know” something by finding an “expert” on a social media platform to guide them to higher returns. This paper suggests that it is primarily unsophisticated individuals who rely on the opinions of others shared on social media platforms when making investment decisions, but there is not much evidence that online postings help those unsophisticated individuals improve their investment quality.
Many people share investment ideas online. This study investigates whether individual investors trade on investment-related Internet postings. We use unique data from a social trading platform that allows us to observe the shared portfolios of traders, their posted comments, and the replicating transactions of followers. We find robust evidence that followers increasingly replicate shared portfolios of traders after the posting of comments. However, postings do not help followers identify portfolios that deliver superior performance in the future. In a cross-sectional analysis, we show that it is mainly followers who are typically considered to be unsophisticated who trade after comment postings.
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