No one can dispute that social media is
big, but is it big enough to predict stock market prices? Many traders are
saying yes and the rise of start-ups offering financial sentiment
analysis services based on social media platforms like Twitter are more than confident that it can.
Companies like SNTMNT, HedgeChatter, DCM Capital and CrowdIndex
(still in BETA mode) claim to be able to classify investor sentiment but how accurately
can one classify emotions like fear and greed using algorithms? Pretty accurately
actually as Johan Bollen, a computer scientist at Indiana University
Bloomington, discovered. In a study published in 2010 Johan investigated
whether measurements of specific moods derived from large-scale Twitter feeds
correlated to the value of the Dow Jones Industrial Average (DJIA) over time.
The algorithms he devised actually predicted the direction of the Dow Jones
closing price within 87.6% accuracy. His sentiment analysis measured mood in
six dimensions (calm, alert, sure, vital, kind and happy). He discovered that
the index rose over a few days of "calm" tweets and dipped after a
few days of more "anxious" feeling tweets.
Pretty neat huh? The question is how long
will it take for social media platforms to not only predict stock prices
but actually begin to influence them?
