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- 14 July 2015
- STATISTICS PAPER SERIES - No. 9Details
- Computational methods to gauge investor sentiment from commonly used online data sources that rely on machine learning classifiers and lexicons have shown considerable promise, but suffer from measurement and classification errors. In our work, we develop a simple, direct and unambiguous indicator of online investor sentiment, which is based on Twitter updates and Google search queries. We examine the predictive power of this new investor bullishness indicator for international stock markets. Our results indicate several striking regularities. 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 former, in particular, is a more powerful predictor of changes in sentiment in the stock market than the latter. Third, we observe that high Twitter bullishness predicts increases in stock returns, with these then returning to their fundamental values. We believe that our results may support the investor sentiment hypothesis in behavioural finance.
- JEL Code
- C1 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General
C12 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Hypothesis Testing: General