THE trend is your friend, as they say on Wall Street. But when it comes to financial decisions, can you trust a Twitter trend? Possibly: an analysis of sentiments expressed on Twitter appears to have given the small London-based firm an edge.
Derwent鈥檚 25 million fund finished its first month of trading in July with a return of 1.85 per cent. By contrast, the Standard & Poor鈥檚 500 financial index fell 2.2 per cent and .
Beginner鈥檚 luck? Perhaps. Or maybe the tweets are helping. Derwent鈥檚 system tracks emotions expressed across 10 per cent of the roughly 100 million daily tweets using algorithms devised by , a computer scientist at Indiana University Bloomington. It then uses this information to predict changes in the stock market.
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In , Bollen鈥檚 algorithms predicted the direction of the daily swing of the Dow Jones closing price with 87.6 per cent accuracy. The index consistently rose a few days after a period of 鈥渃alm鈥� tweets and dipped a few days after a period of 鈥渁nxious鈥� tweets (arxiv.org/abs/1010.3003).
Derwent is not alone in its approach. 鈥淪entiment analysis makes a huge amount of sense to a lot of people 鈥� there are a lot of companies looking into this, including Reuters, Dow Jones and many start-ups,鈥� says , an analyst who chairs the .
Recently, financial firm Bloomberg partnered with WiseWindow, based in Irvine, California, which claims to offer a 鈥渘ear direct correlation between social media conversations and stock price鈥� by aggregating information from Twitter, Facebook, blogs and such. Unlike Derwent, WiseWindow sorts the opinions it collects online by industry. In one test, WiseWindow found that opinions about cars are particularly good at predicting the stock prices of Ford and General Motors, for example.
聯Social-media opinions about cars are particularly good at predicting Ford and GM stock prices聰
Will sentiment analysis of tweets and blogs revolutionise stock market forecasting? No. Marketers and investors have been surveying the public鈥檚 mood for ages through focus groups and surveys. The only thing that has changed is that social media and powerful analytical software now provide a way to keep constant tabs on how the masses are feeling. Improvement in our predictions of stock market movements will be small. But even a 1 or 2 per cent increase in profit represents huge sums for multibillion-dollar investment firms.
鈥淲hat we鈥檙e doing now could only have happened because of social media,鈥� says , CEO of WiseWindow. 鈥淭he fact that it works shouldn鈥檛 be so astonishing to us 鈥� it鈥檚 still just people. People are saying, 鈥業 want this, I don鈥檛 want that鈥� and their choices drive revenue. We are just processing it much faster.鈥�
