Nowadays social media is impacting all spheres of our lives. In this light, is it not imperative to think what role it plays in stock market behavior? It is not surprising to know that social media data analysis is now a fully fledged business. Stock market traders and hedge funds are ready to pay erratic sums to be ahead in this game.
How social media is impacting the share market
Below are couple of recent evidences, which may better reveal impact of social media on the stock markets:
- The first case is of Social Market Analytics, a firm specializing in social media data analysis. The analytics firm processes around four lac twitter accounts on regular basis. Based on this extensive coverage last August they told their clients that a positive chatter is spreading on twitter about iPhone maker Apple. In reality Social Market Analytics’ call was followed by a tweet from renowned trader Carl Icahn. As it turned out, the trader had purchased the stock in big sizes. The analytics’ company’s customers, as a result, made a killing on the day.
- Our second case is about Blackberry buyout deal with Fairfax Financial last year. When the $4.7 billion buyout deal with the investment group broke apart on 11th Nov 2013, it was first leaked out in a Canadian newspaper. Wall Street got this information after around 3 minutes. This 180 seconds delay is a lot for intraday traders to act on the news. However, clients of Dataminr got emails within seconds. The mail from New York City-based data analytics firm led to their clients getting the news well ahead of the rest.
In yet another incident highlighting importance of social media for our stock markets, one may highlight rumors of white house explosions on 23rd April 2013. News agency Associated Press’ twitter handle @AP tweeted at around 1:07 pm ET “Breaking: Two Explosions in the White House and Barack Obama is injured.” Though Associated Press quickly said that the account was hacked, damage was done in the stock markets. Dow Jones Industrial Average lost more than 140 points and US treasuries bond futures rallied sharply after the hacking incident. Later the Dow index recovered only when White house press secretary Jay Carney said that the president is fine.
This goes to show that data mining of social networking sites and various news sources is already a profitable venture. Markit, a financial data services provider, conducted a study on the topic. The time horizon for the study was 2 years starting from December 2011. The project’s main conclusions were, positive social media sentiment stocks have shown cumulative returns of 76% while negative social media sentiment stocks generated around -14% returns during the study period.
So far we talked about Social sentiment indicators. These social sentiment indicators are basically based on information users post publicly to Face book, Twitter, blog posts, discussion groups and forums. Another analysis can be made by using Google trends. Google Trend is basically Google provided summary analysis of various search terms. It reveals how often any particular word has been searched via Google search engine in relative sense.
Also Read : Sentimental Economy
Based on analysis of search trends on Google, during and across India’s general elections in May 2014, Narendra Modi’s name had helped Indian stock markets. In the chart below, blue line is relative search position of Narendra Modi, while red line is relative search inquiries about Rahul Gandhi, main competitor of the Modi during the elections. When the difference between blue and red line is positive and high, Indian benchmark equity index has performed better. Below is a monthly chart summarizing the trendiness of the two leaders…