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Stocks and Tweets

Oct 25, 2010 • Behavioral Economics, Financial Markets • 183 Views    No Comments

An Indiana University researcher thinks he has confirmed that mood and stock market movement correlate. The results, though, were not what he expected.

1) Originally, he and his students thought that they would discover a positive relationship between the direction of the Dow and Twitter sentiment. However, the connection was not sad tweets on down days and happy ones after the Dow went up. It was “calm vs. anxious.”

2) The big surprise was that their original prediction was backwards. Looking at millions of tweets for emotional indicators, they discovered that the tweets came first. A slew of calm tweets meant the Dow would probably rise. Anxious tweets and it fell. Their accuracy? An 86.7% success rate.

Can Twitter be used to predict the Dow?

The Economic Lesson

The Dow Industrial Average is an index number. Computed through a formula that uses the stock prices of 30 large companies, it provides an indication of the direction of financial markets for a specific time.

Stock price movement is one component of the Index of Leading Indicators that is compiled by the Conference Board. As a “leading indicator” it helps predict where economic activity is heading.

Is Twitter sentiment a leading indicator of a leading indicator? You might find an answer in A Random Walk Down Wall Street by Princeton professor Burton Malkiel.

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