The Effects of Twitter Sentiment on Stock Price Returns

Social media are increasingly reflecting and influencing behavior of other complex systems. In this paper we investigate the relations between a well-know micro-blogging platform Twitter and financial markets. In particular, we consider, in a period of 15 months, the Twitter volume and sentiment about the 30 stock companies that form the Dow Jones Industrial Average (DJIA) index. We find a relatively low Pearson correlation and Granger causality between the corresponding time series over the entire time period. However, we find a significant dependence between the Twitter sentiment and abnormal returns during the peaks of Twitter volume. This is valid not only for the expected Twitter volume peaks (e.g., quarterly announcements), but also for peaks corresponding to less obvious events. We formalize the procedure by adapting the well-known "event study" from economics and finance to the analysis of Twitter data. The procedure allows to automatically identify events as Twitter volume peaks, to compute the prevailing sentiment (positive or negative) expressed in tweets at these peaks, and finally to apply the "event study" methodology to relate them to stock returns. We show that sentiment polarity of Twitter peaks implies the direction of cumulative abnormal returns. The amount of cumulative abnormal returns is relatively low (about 1-2%), but the dependence is statistically significant for several days after the events

Non-Parametric Causality Detection: An Application to Social Media and Financial Data

According to behavioral finance, stock market returns are influenced by emotional, social and psychological factors. Several recent works support this theory by providing evidence of correlation between stock market prices and collective sentiment indexes measured using social media data. However, a pure correlation analysis is not sufficient to prove that stock market returns are influenced by such emotional factors since both stock market prices and collective sentiment may be driven by a third unmeasured factor. Controlling for factors that could influence the study by applying multivariate regression models is challenging given the complexity of stock market data. False assumptions about the linearity or non-linearity of the model and inaccuracies on model specification may result in misleading conclusions. In this work, we propose a novel framework for causal inference that does not require any assumption about the statistical relationships among the variables of the study and can effectively control a large number of factors. We apply our method in order to estimate the causal impact that information posted in social media may have on stock market returns of four big companies. Our results indicate that social media data not only correlate with stock market returns but also influence them.Comment: Physica A: Statistical Mechanics and its Applications 201

Using Twitter trust network for stock market analysis

Online social networks are now attracting a lot of attention not only from their users but also from researchers in various fields. Many researchers believe that the public mood or sentiment expressed in social media is related to financial markets. We propose to use trust among users as a filtering and amplifying mechanism for the social media to increase its correlation with financial data in the stock market. Therefore, we used the real stock market data as ground truth for our trust management system. We collected stock-related data (tweets) from Twitter, which is a very popular Micro-blogging forum, to see the correlation between the Twitter sentiment valence and abnormal stock returns for eight firms in the S&P 500. We developed a trust management framework to build a user-to-user trust network for Twitter users. Compared with existing works, in addition to analyzing and accumulating tweets’ sentiment, we take into account the source of tweets – their authors. Authors are differentiated by their power or reputation in the whole community, where power is determined by the user-to-user trust network. To validate our trust management system, we did the Pearson correlation test for an eight months period (the trading days from 01/01/2015 through 08/31/2015). Compared with treating all the authors equally important, or weighting them by their number of followers, our trust network based reputation mechanism can amplify the correlation between a specific firm’s Twitter sentiment valence and the firm’s stock abnormal returns. To further consider the possible auto-correlation property of abnormal stock returns, we constructed a linear regression model, which includes historical stock abnormal returns, to test the relation between the Twitter sentiment valence and abnormal stock returns. Again, our results showed that by using our trust network power based method to weight tweets, Twitter sentiment valence reflect abnormal stock returns better than treating all the authors equally important or weighting them by their number of followers