Research on stock market sentiment keeps coming. In April, I wrote about attempts to measure sentiment through music choices on Spotify. Here’s an even quainter twist from two researchers at Karlsruhe Institute of Technology (KIT), on the connection between positive emojis and short-term stock price reactions. 🙄
Social networks and platforms like Yahoo! Finance or Reddit have a large number of posts on specific stocks. Participants, or their target groups, are typically retail investors who trade frequently through zero-commission brokerages like Robinhood. They tend to choose meme stocks like Gamestop, AMC, or Tesla. During the pandemic, they had plenty of time to discuss and trade.
Textual analysis of stock market comments is nothing new. The two KIT researchers, however, went a different path: They analysed the use of emojis in Reddit posts. Their idea is that such usage may improve communication and build trust between the participants.
And, indeed, they find significant price reactions: Comparing the amount of positive emojis with the previous hour’s amount – we’re talking really short-term reactions here – they find that a change in emoji sentiment of one standard deviation is associated with an abnormal return of 0.06 per cent. While this may seem paltry, the annualised abnormal return is stated at more than 100 per cent.
Not that I think hourly returns should be annualised, but it does provide an interesting scale. The average hourly return is only half as large, i.e. 0.03 per cent.
The remarkably strong effect may be caused by a short squeeze, meaning that the sudden jump in demand forces short sellers to cover their shorts, making demand jump even higher.
This is more pronounced for stocks with higher short-term volatility. In fact, for these stocks, there is a stronger relation for emojis than for plain text. 🤪 Either presumably rational investors are more strongly influenced by symbols than by text, or they may simply feel that these small symbols express their opinions of stocks in a more precise and scientific manner.
If you want my own opinion on this matter, I believe it can be succinctly put thus: 🤔
“Emojis and Stock Returns”
Felix Reschke, Jan-Oliver Strych, March 2022