As the projected valuations of social media behemoths such as Facebook continue their breathtaking ascent above companies which were once considered cornerstones of the American economy, it has become increasingly clear that finance will play an ever-larger role in the sphere of social media. However, what is less apparent, and quite possibly equally important, is the role that social media will play in finance.
At first glance the relationship is obvious; financial markets are thought to be driven by the perpetual flow of new information and social media provides this flow in near (if not actual) real-time. For those in the financial community who base decisions on real-time information, the value of social media is well defined.
If social media’s relationship with finance were simply fashioned as a means of obtaining real-time news; it would serve a function, but not necessarily fill a void. In truth, software offered by traditional news outlets, such as Bloomberg Professional, already provide breaking, up to the minute news feeds quite competently (albeit at a hefty price tag).
Recent research is beginning to shed light on a new and possibly game-changing role for social media in finance. In late 2010, Johan Bollen, Huina Mao, and Xiao-Jun Zeng published a paper in the Journal of Computational Science, giving cause to believe that social media is quite possibly providing a service that goes far beyond real time news – astonishingly, it may in fact be predicting price changes in the stock market.
During the course of their study, the three researchers evaluated nearly ten million tweets over a nine month period of time in 2008. The authors used a program to comb through tweets gathered over each individual day of that period. This program only collected and organized tweets pertaining to certain keywords which express different emotional states. Based on the frequency of a particular emotion tweeted during the previous three days, the researchers predicted the direction of the stock market on the fourth day. Using this approach, they correctly predicted the direction of the Dow Jones Industrial Average closing price nearly 3 out of 4 times, or 73.3% of the time. Even more remarkably, 86.7% of the time they were able to nail the direction of the DJIA close, 3 to 4 days in advance (you’ll want to check out an article written by Socionomics Institute for a more in depth look at this research – Socionomics Institute is in no way related to Socialnomics).
The implications of this study are profound. It could very well mean that stock markets are influenced by social mood. This directly contradicts the inverse mainstream belief that the mood of a society is influenced by the stock market. In other words, we are learning that society is not gloomy because the stock market is slumping, but rather that the stock market is slumping because society is gloomy.
Most simply, this ground-breaking research also implies that social media could play a huge role in the sphere of finance through the years to come. It appears that we have only scratched the surface in discovering and analyzing this relationship. If social media does in fact have the ability to predict price movements in stock markets, it’s role in finance has unlimited potential.
Naturally, a hedge fund hoping to capitalize on the prospective success of social media in finance has quickly sprouted. The Derwent Absolute Return Fund Ltd is in the process of establishing a fund that plans to aggregate tweets to gauge market sentiment in hopes of predicting price changes in the stock market. The fund was due to launch in early April but this date was pushed back because of higher than expected investor interest. They have chosen to restructure the fund to accommodate the increased demand.
As further studies continue to shed light on the relationship between social media and finance, new social media start-ups are hoping to help. Online social communities, engaged specifically and entirely in the realm of finance, could be used much like Twitter in evaluating the sentiment of society to ultimately predict market movements.
Shmish.com, which launched in early May, is a social news site dedicated to the sharing of finance related news. The user-base is currently too small to accurately measure the sentiment of the financial community. However, being that Shmish is focused entirely on the sphere of finance and is built on an easy to navigate, user-friendly, intuitive platform – it’s a likely candidate to harbor future studies of social news and its predictive abilities.
As it is often quipped in financial circles – there is no ‘holy grail’ approach to market analysis. That being said, social media may prove to be an immeasurably valuable tool in helping to understand underlying market sentiment and in turn predicting price movements of the stock market.
So stay social. Share, vote and comment in communities like Shmish. Our collective thoughts just may prove to be priceless.
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