In traditional financial theory, the stock price is determined by supply and demand in the stock market. However, recent studies have shown that investor sentiment can strongly influence stock markets.
In a study newly published in Physica A, researchers examined the relations between daily happiness sentiment and stock market performance.
Daily happiness data were derived from 50 messages posted on Twitter during 2008 – 2015.
To quantify the happiness of tweets, researchers focused on words like laughter, joy, successful, winning, excellent, rainbow, etc. Tweets about Thanksgiving, Christmas Eve, and other holidays were not included.
Ten stock markets in the world were selected for analysis. These markets were in the USA, Canada, France, Germany, UK, Hong Kong, South Korea, Japan, Australia, and New Zealand. All the countries and region had lots of Twitter users.
The capital market data were from YAHOO! Finance. The opening and closing price of indexes, the highest and lowest price of indexes, and the trading volume were included in the analysis.
Indexes included but not limited to S&P 500, NASDAQ Composite, S&P/TSX, DAX, Hang Seng, Nikkei 225, S&P/ASX 200, and NZX 50 INDEX.
Researchers found that daily happiness on Twitter was strongly related to stock return. The happier the sentiment was, the higher the return was, and vice-versa.
Moreover, happiness sentiment could cause the return for 63% of (7 out of 11) indexes (Granger causality analysis), but not the other way around.
The result also showed that the most-happiness trading days had the largest stock return, whereas the least-happiness trading days had the smallest stock return.
This might be because the peaks and valleys of happiness are related to extreme macroeconomic events in the market, for example, the global financial crisis, the European sovereign debt crisis, etc.
These findings suggest that online sentiment on social media is useful to predict stock market performance. Future work will examine how investor sentiment influences the performance of emerging stock markets.
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