Finance and Economics Discussion Series (FEDS)
May 2023
More than Words: Twitter Chatter and Financial Market Sentiment
Travis Adams, Andrea Ajello, Diego Silva, Francisco Vazquez-Grande
Abstract:
We build a new measure of credit and financial market sentiment using Natural Language Processing on Twitter data. We find that the Twitter Financial Sentiment Index (TFSI) correlates highly with corporate bond spreads and other price- and survey-based measures of financial conditions. We document that overnight Twitter financial sentiment helps predict next day stock market returns. Most notably, we show that the index contains information that helps forecast changes in the U.S. monetary policy stance: a deterioration in Twitter financial sentiment the day ahead of an FOMC statement release predicts the size of restrictive monetary policy shocks. Finally, we document that sentiment worsens in response to an unexpected tightening of monetary policy.
Keywords: Financial Market Sentiment, Monetary policy, Natural Language Processing, Stock Returns, Twitter
DOI: https://doi.org/10.17016/FEDS.2023.034
PDF: Full Paper
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