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22ndannualcapital

Social media skew Greek bond spreads

A recent study by Theologos Dergiades, of the International Hellenic University, Costas Milas, and Theodore Panagiotidis, University of Macedonia, shows social media have progressively become a popular open forum for analysing economic/financial topics and a field where the public sentiment is reflected in real time. As noted they are widely used by influential economic commentators, policymakers and their followers.

The researchers examined whether the information contained in social media (Twitter, Facebook & Google Blogs) and web search intensity (Google) influences financial markets. Using a multivariate system and focussing on Eurozone’s peripheral countries, the GIIPS (Greece, Ireland, Italy, Portugal and Spain) as well as two of Eurozone’s core countries (France and the Nethelands), they showed that social media discussion and search-related queries for the Greek debt crisis provide significant short-run information primarily for the Greek-German and Irish-German government bond yield differential even when other financial control variables (international risk, Eurozone’s risk, default risk and liquidity risk) are accounted for, and to a much lesser extent for Portuguese, Italian and Spanish sovereign yield differentials. Social media discussion and Google search-related queries for the Greek debt crisis did not affect spreads in France and the Netherlands.

It is clear that web search intensity could be linked to both rising and falling. The importance of online search activity has already received the attention of the financial press. It is clear that web search intensity could be linked to both rising and falling spreads. Indeed, search intensity is mainly triggered upon the arrival of news (supplementary information) which can be either good or bad. News for a country’s economic fundamentals (or even political stability) can be understood as signals that convey valuable pricing information especially for financial securities issued by the government.

An asymmetry in the findings of the reverse causality first puzzled researchers since they initially assumed a homogeneous profile (in terms of education and capacity to comprehend economic topics) for the users of both data sources. Provided that Google is used by a wide range of users, a small fraction of those is anticipated to comply with the profile described above and therefore their impact on search intensity due to the evolution of spreads is expected to be rather small. On the other hand, Twitter users (the number of #Grexit mentions primarily comes from Twitter) are more educated relative to Google users, implying there was an exception for a larger fraction of users.

to meet the profile described above. It appears that, for the case of Greece, the size of the fraction of users meeting the profile above is large enough to verify causality from spreads towards the number of #Grexit mentions.

The researchers found no causality of the volume of activity in social media and web search intensity on the sovereign spreads of France and the Netherlands. Therefore, their findings suggest that borrowing costs in a set of Eurozone’s core countries (in this case France and the Netherlands) remained immune to social media and Google queries information related to the Greek crisis.

To sum up, the study showed that Greek debt crisis related information in social media and Google search queries does influence financial markets. This is mainly so for Greece and Ireland, and to a much lesser extent for Italy, Portugal and Spain. This could be viewed as a weak signal of contagion from Greece to (some of) the remaining GIIPS in the sense that social media discussion and Google search queries related to the Greek debt crisis carry some predictive information for the cost of borrowing in other peripheral Eurozone economies.