A recent paper presented at the ACM International Conference on Web Search & Data Mining uses a simulation to show that a trading strategy based on Twitter conversations can outperform the Dow Jones and basic trading strategies. Using twitter and stock market data over a four-month period, the study also finds that the number of distinct twitter conversations about a stock is a strong predictor of stock trading volume. A higher number of distinct conversations is also positively related to higher stock prices while lower number of conversations can predict a lower stock price.
While past research has looked the sentiment, positive or negative, of tweets to predict stock price, little research has focused on the volume of tweets and the ways that tweets are linked to other tweets, topics or users. Further, past work has mostly studied the overall stock market indexes, and not individual stocks.
A key limitation of the study is that the market lost value during the examined time period. Thus the Twitter based strategy outperformed other strategies by losing the least amount.
For the study, the researchers simulated a series of investments between March 1, 2010 and June 30, 2010 and analyzed performance using several investment strategies.
- How Twitter may help predict stock prices (business.financialpost.com)
- Want to check the markets? See what’s trending… (independent.co.uk)