Saturday, March 23, 2013

Can Twitter Predict the Stock Market?



With all the talk about prediction models, I decided to look at a model to try and predict something important: a way to make money. Big data and the stock market seem like a perfect union of a technology and application. The stock market has hundreds of years of historical performance data and no shortage of real-time performance data. One would assume that someone would have already created a model using Big Data techniques to accurately predict how the stock market will move and have become wealthy as a result. Indeed, many investment companies have swung the trend toward hiring statistics wizards to create algorithms to predict the stock market. A short description of a potential algorithm-based trading scenario can be found at this link under the heading, “One Possible Scenario”: http://www.futuristspeaker.com/2012/12/will-big-data-destroy-the-stock-market/. Just as a side note I do not agree with the slant of this article saying the use of algorithms will eventually destroy the stock market, although that scenario did occur in a book I read by Tom Clancy called Debt of Honor.


However, are these algorithms really the best way to predict the stock market anyway, or is there a better way. According to this article, http://www.dailymail.co.uk/sciencetech/article-2120416/Twitter-predicts-stock-prices-accurately-investment-tactic-say-scientists.html, researchers at Cal-Berkeley have developed a model based solely on Twitter data in following the stock market, and do not look at any real financial patterns like most stock market algorithms do. During a four-month 2010 test trial, the Twitter-based model performed better than the Dow Jones average and out-paced conventional baseline models by 1.4-11%. To make this model, the researchers did not use sentiment analysis (positive or negative reaction to a stock) but more looked at pure volume of tweets about a particular company as well as how those tweets linked to other tweets or users.


To be fair, I am not sure I would trust that Twitter data can accurately predict the stock market. Perhaps there is some connection between the amount of buzz around a company (maybe buzz about Apple releasing a new product) and its future price but beyond that I am skeptical about this relationship. The researchers from the article linked above also expressed their caution that this model was tested in a declining market, and they did not know how the performance would translate to a market with overall rising prices. Personally, I would rather stick with traditional analysis about stock prices until it can be proven why Twitter or any other social media engine would be more accurate than detailed company financial indicators.

3 comments:

  1. This is a very interesting article, Eric, and I agree totally with your idea in this blog. Looking at the idea that social media to predict the stock market from a distance seems to have merit. Stock prices depend on what people do, and social media is people telling each other what they are doing. However, this probably would just be a small part of the model used for accurate predictions. Mining Twitter data for the sheer volume of mentions of a company or its product is simply an extension of using Google Trends.
    At best, this information should just be used as aid to making an investment decision, not a basis for one. A prime reason not to base your investment strategy off social media is the case of Enron. From February to December 1997, Enron made headlines and would have set social media buzzing. However, this wasn’t because of a surge of positive popularity. The executives at Enron were hiding hundreds of millions of dollars in quarterly losses, and this discovery caused there stock to plummet from $75 in February to 26 cents in December when they filed for bankruptcy. On the flip side, there are many companies performing very well in the stock market that no one is mentioning in social media. I don’t remember the last time a hedge fund management group or some research corporation was trending on twitter.
    As I said before, social media is only a small piece of the puzzle that is the stock market.
    Source:
    http://www.forbes.com/sites/timworstall/2013/01/14/using-twitter-facebook-and-social-media-to-predict-stock-prices/
    http://www.time.com/time/specials/packages/article/0,28804,2021097_2023262,00.html

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  2. Very informative article.. But I think predicting TWTR stock market is not a good idea and no one can actually do it. As the stock market is very complex no one knows what will happen next.

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