According to a newly released study by the European Central Bank, social media Twitter would be able to predict the stock market evolution. In a 23 page report, the ECB lays down the conclusion of a statistical study that shows that the analysis of social media platform Twitter posts tend to lead google search and investor sentiment on the stock market.
As explained by the European Central Bank, “first, changes in Twitter bullishness predict changes in Google bullishness, indicating that Twitter information precedes Google queries. Second, Twitter and Google bullishness are positively correlated to investor sentiment and lead established investor sentiment surveys.” The research goes further into details, “Twitter bullishness has a statistically and economically significant predictive value in respect of share prices in the United States, the United Kingdom and Canada.”
Twitter can predict if stock market will go up or down
What the results of the ECB’s study demonstrate is that the content of Twitter posts can tell you whether equity stocks will go up or down on that day. Indeed, most active traders that are also using the social media tend to complete their “Tweets” with a string of hashtags among which “bullish” and “bearish” are extremely frequent. People will basically tweet financial news or a corporate events and add their opinion on how they believe the news will impact the underlying asset prices using the mentioned hashtags. In short, this traders’ crowd is doing the News Trading job for you.
The ECB found that a one point move on the Daily Sentiment Index, a survey currently used, leads to a 2.26 basis points rise in daily Dow returns. But the same change in the ECB’s Twitter sentiment indicator is followed by a 12.56 basis points increase in Dow returns on the following day. The Dow here refers to the Dow Jones Industrial Average which is the major benchmark for US incorporated industrial companies and was the most followed equity index before the S&P 500 Index took over a few years ago as the economy was drifting away from the industry into services. The ECB survey added that “”This impact is statistically significant at the 99% confidence level.” All this means that Twitter has a statistically
The Twitter Index is only relevant for short term investments
Nevertheless, the ECB also specifies that the Twitter indicator is only able to predict short term moves, up to one day. The Central Bank was not able to find any statistical correlation between its proprietary designed Twitter Index level and the evolution of the market the following day. The indicator should thus not be used to consider long term investments. This indicator is however completely compatible with the trading of binary options that are short term instruments with maturities of less than a day (30 seconds binary options, 60 seconds, 1hour…). If you don’t already have a Twitter account you should set one up immediately and start following influent traders and investors that may provide you with the right market direction.
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You can also have a closer look at the study here.