Twitter-based economic uncertainty and corporate bond credit spreads

Twitter, with its large subscriber base, has become a prominent platform for real-time economic debate and discussions on financial assets. This study analyzes the impact of Twitter-based Economic Uncertainty (TEU) on the corporate bond market, a major asset class characterized by institutional dominance and dealer intermediation. We find a positive and significant relationship between TEU and corporate bond credit spreads, consistent across both investment grade and non-investment grade bonds. This effect intensifies in the post-Volcker Rule era, particularly for non-investment grade bonds, suggesting that regulatory changes have amplified the market's sensitivity to social-media-driven economic uncertainty. We also examine the impact of TEU on corporate bond market liquidity and the behavior of liquidity providers during periods of heightened uncertainty, a topic that has received considerable attention in the literature. Our analysis shows that elevated TEU is associated with reduced liquidity in inter-dealer trades, suggesting that dealers become more cautious under uncertainty. Conversely, illiquidity measures based on customer trades show a negative association with TEU, implying that customer trading activity increases when economic uncertainty rises. To ensure the robustness of our findings, we utilize a residual TEU measure and control for default risk, confirming the independent and significant role of TEU in influencing both credit spreads and liquidity. These findings demonstrate the growing importance of social media as a real-time indicator of economic uncertainty, with measurable effects on pricing and liquidity dynamics in the corporate bond market.