Emotions are Contagious: Social Network and Mood-Induced Stock Returns

This paper studies how individual investor’s moods can be aggregated to social moods through emotional contagion and test the hypothesis that social interactions amplify the mood changes at the social level and therefore lead to higher mood-induced returns. We construct social network structure for each firm’s local investor base and show that cross-sectionally stocks with higher local social interactions exhibit higher mood-induced returns. This effect cannot be explained by stock and firm characteristics or existing return seasonalities, and is stronger for small, retail, and volatile stocks. The evidence strongly supports the notion that social mood, or more broadly social behavior, is a key determinant of stock returns.