Has Twitter become so powerful and pervasive that it can actually predict the stock market? What does this mean for social media?
Full post here. Excerpts below.
From The Physics arXiv Blog at Technology Review published by MIT
An analysis of almost 10 million tweets from 2008 shows how they can be used to predict stock market movements up to 6 days in advance:
- Conventional economic theory holds that the movement of prices in a perfect market should follow a random walk and should be impossible to predict with an accuracy greater than 50 per cent.
- There’s a fly in this economic ointment, however. Numerous studies show that stock market prices are not random and this implies that they ought to be predictable. The question is how to do it consistently.
- One algorithm, called the Google-Profile of Mood States (GPOMS), records the level of six states: happiness, kindness, alertness, sureness, vitality and calmness.
- So these guys took 9.7 million tweets posted by 2.7 million tweeters between March and December 2008 and looked for correlations between the GPOMS indices and whether Dow Jones Industrial Average rose of fell each day.
- In fact, the calmness index appears to be a good predictor of whether the Dow Jones Industrial Average goes up or down between 2 and 6 days later. “We find an accuracy of 87.6% in predicting the daily up and down changes in the closing values of the Dow Jones Industrial Average,” say Bollen and co.