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Researchers Use Twitter as a Stock Market Barometer

by Amar Toor on October 19, 2010 at 09:20 AM

trader at new york stock exchange
Wanna know where the stock market is headed? According to new research from Indiana University, Twitter may hold the answer.

Indiana's Johan Bollen and his team of researchers recently investigated whether Twitter could be used as an accurate stock market weather vane, based on the presumption that the microblogging platform could give some insight into the mood of the country. To test their hypothesis, Bollen and his team used an algorithm known as the Google-Profile of Mood States (GPOMS)--a series of indices which measure the overall mood of Twitter users, based on the words they use in their 140-character tweets.

In this case, researchers examined six mood states: happiness, kindness, alertness, sureness, vitality and calmness. They then took a sample of 9.7 million tweets posted between March and December 2008, and looked for any correlation between the day-to-day shifts in the GPOMS indices, and the fluctuations in the Dow Jones Industrial Average. Surprisingly enough, they discovered that only one mood had a strong correlation with the Dow's performance: calmness. According to Bollen and his team, the calmness index can predict where the Dow average will go in two to six days -- and with a remarkable 87.6-percent accuracy.

That kind of precision is certainly impressive, but Technology Review highlights some important caveats to keep in mind. For one, Bollen doesn't propose an economic or behavioral mechanism through which calmness could affect the Dow Jones. One could, of course, suppose that calm tweets reflect investor confidence. But, as Paul Krugman proved in a seminal 1991 paper (.PDF), expectations aren't the only thing that determine economic outcomes, since recent history and various economy-specific peculiarities can often weigh just as heavily.

The restrictiveness of Bollen's study, moreover, could limit the extent to which his results can be generalized. Although he restricts his scope to an American stock index, he doesn't specify whether or not the tweets he studied came from U.S. users, or from abroad. The period under consideration, moreover, was uniquely tumultuous, and, as a result, the stock market was probably a more popular topic of Twitter conversation than it would be during less chaotic times.

Who knows if this study will spur investment banks to open new Twitter research departments, but the next time we tweet about our stock portfolio, we'll try to do so in a "calm" manner -- just to be safe.

Tags: business, calm, Dow Jones, DowJones, Economics, finance, financial crisis, FinancialCrisis, indiana university, IndianaUniversity, johan bollen, JohanBollen, Predictions, SocialNetworking, stocks, top, tweets, twitter, web

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