Twitter Beats the Stock Market

Hedge Funds look at all sorts of data to gain an edge over the market. The ideal market insight tool you might imagine would be some sort of micro-blogging platform, where millions of people would express how they are feeling at any point in time. ie. – Twitter.

It seems Derwent Capital have done just that. Using a paper that came out of University of Manchester and Indiana University, which found a correlation between mood and Twitter.

The number of emotional words on Twitter could be used to predict daily moves in the Dow Jones Industrial Average. A change in emotions expressed online would be followed between two and six days later by a move in the index, the researchers said, and this information let them predict its movements with 87.6 percent accuracy

The Derwent Capital algorithm specifically looks at the level of calmness on Twitter.

Their results showed that rises and falls in the number of instances of words related to a calm mood could be used to predict the same moves in the Dow’s closing price between two and six days later, with a fall in these “calm” words being followed by a fall in the index. The other moods did not have the same predictive quality, the paper said.” Specifically, it looks for words like “alert,” “happy,” and “vital,” adds Financial News’ Michelle Price. “Derwent Capital scans a selected 10% of available tweets at random and will then categorise these messages into one of a range of mood states.

It is only in its first month, but the fund has already considerably beaten the market average. If some sort of feedback loop could be added (which can lead to dangerous spirals), or as various tweaks are added, this could rise considerably. Stay tuned – we’ll let you know.

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