What Does Twitter Have To Do With The Volatility Index?

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The Volatility Index and its corresponding exchange-traded note iPath S&P 500 VIX Short Term Futures TM ETN VXX 18.38% is sitting near a multi-decade low at a time when political tensions both domestically and internationally are at a worrisome level. How is this even possible?

According to Gadfly's Mark Gilbert, the answer is simple: social media. Gilbert cited the executive chairman of Templeton Emerging Markets Group Mark Mobius, who said last week that social media platforms are "creating confusion with a lot of false news." Ironically, this is having a "calming effect."

Mobius argued there is so much fake news floating around social media that eventually people get fed up with figuring what's true and what isn't. After giving up, many people are saying "the heck with it."

"You're getting a situation where a lot of information is discounted immediately because people are afraid that maybe the information they're getting is not true," Mobius previously said.

Ironic or not, Mobius' comments come at a time when Twitter Inc TWTR 6.21%'s daily and monthly active user metrics are showing encouraging signs and attracting the attention of analysts. The company has also made the platform more user-friendly by no longer including photos and links within the 140-character limit.

So, there is at the very least a basic correlation between Twitter's resurgence with the rise of fake news and low volatility. It is likely difficult if not impossible to prove a conclusive correlation between Twitter and other social media platform's influence and the "fear index."

The Ambiguity Effect

Gilbert continued that individuals who are distracted by information they mistrust "feed a cognitive decision-making bias" called the ambiguity effect. This implies that people avoid making decisions in which the outcome is less certain and prefer scenarios with a more predictable outcome.

In other words, "subjecting investors to a firehose of potentially fake news is a recipe for suppressing activity and damping price moves."

At time of publication, Twitter shares were down 5.7 percent at $18.38.

https://www.benzinga.com/news/17/05/9479784/what-does-twitter-have-to-do-with-the-volatility-index