The Impact of the Social Mood on the Italian Sovereign Debt Market: A Twitter Perspective

Abstract

AbstractBy analysing the relationship between a new experimental daily index based on Twitter data (the Istat’s Social Mood on Economy Index—SMoEI) and the structure of Italian (and Spanish) sovereign interest rates, our work sheds new light on the great significance of the interconnections between economic sentiment and the Italian sovereign bond market. A placebo test performed on Spain introduces a possible extension of this linkage to the European market, highlighting the deep integration of financial markets within the European Monetary Union. Within a VAR and VECM framework with daily frequency data (2016–2022), we show that public shaping mechanisms play a role in the cost of debt financing. Our analysis emphasises the importance of economic sentiment when it comes to financial markets, putting the role of macroeconomic fundamentals in a different light. This result should be interpreted with caution, as updates to fundamentals can be affected by a time lag. In any case, recognising the importance of this index has at least two implications: on the one side, the SMoEI could represent a more responsive indicator for predicting investor sentiment; on the other side, media channels—as well as the European and national institutions—should gain relevance for their potential impact on collective sentiment, encouraging the importance of economic education and non-alarmist communication.