A new academic paper concludes there is a relationship between social media conversations, Google search trends that exacerbated the Greek bond crisis, as first reported by Jason Douglas of The Wall Street Journal.

Greek Bond Crisis

Tweets and Facebook posts had a hand in the Greek bond crisis

The paper draws a stunning conclusion: Tweets and Facebook posts impacted markets, driving up the cost of borrowing for the Greeks during their bond crisis.  The study considered German bond prices as the baseline of stability and then the spread, or price differential, between bonds in Greece, Ireland, Italy, Portugal and Spain – then overlays social media activity and the content of tweets and posts to determine their findings.

The results can be negative for sovereign nations seeking to finance their daily operations. “Rapidly rising government bond yields add to the burden a country faces to borrow in international markets and therefore undermine its ability to roll existing debt over at a low cost. The fact that the country has to roll its debt over at high interest rates worsens its fiscal prospects, making default more likely,” the report, from researchers at the University of Macedona, concludes, saying that social media can help fuel a crisis of confidence into a self-fulfilling prophecy. The report also noted a causality between negative news about Greece and impact on smaller countries, such as Ireland, indicating a contagion of sorts.

Greek Bond Crisis: Increased social media activity implies higher risk

“Increased social media activity (in terms of bad news) implies higher risk which, in turn, results in a higher spread,” researchers Theologos Dergiades, Costas Milas and Theodore Panagiotidis wrote.  “This very issue is arguably a hostage to fortune. Indeed, it suggests that the more policymakers talk about the Greek debt crisis, and hence the more the social media refer to it, the more spreads will rise.”

The report noted that while Google Inc (NSADAD:GOOG) (NASDAQ:GOOGL) and Facebook Inc (NASDAQ:FB) were important, Twitter Inc (NYSE:TWTR) was the most influential method for negative news surrounding the Greek debt situation to spread.  “It is clear that web search intensity could be linked to both rising and falling spreads,” the report noted, just before it factored the more influential method of forwarding news via Twitter.

Twitter has been noted a factor in market behavior on several occasions, as false tweets have triggered flash crashes, as in the case of the AP Twitter feed being hacked by Syrian government supporters and tweeting false information. Hedge funds also utilize algorithmic formulas to look for patterns in Twitter discussions and stock prices, as previously documented in ValueWalk.