An investigation of the impact of electronic communication on financial markets

This paper uses the popular social networking site Twitter to test recent theories on the importance of communication through networks. I create a unique data set that precisely measures the network size and credibility of each contributor to the site. I test the theory of DeMarzo et al (2003) that an agent's influence is a function of his credibility and the size of his network, as well as the Colla and Mele (2010) theory of correlated trading among social groups. I show that influence is a function of network credibility and network size. I also find that there is positively correlated trading among agents in a social network and negatively correlated trading with agents outside of the network. Finally, using portfolios sorted on level of attention, I find support for the Merton (1987) theory of investor recognition which predicts that low attention stocks should exhibit positive risk adjusted returns.