Twitter financial community sentiment and its predictive relationship to stock market movement

Abstract

Twitter, one of the several major social media platforms, has been identified as an influential factor for financial markets by multiple academic and professional publications in recent years. The motivation of this study hinges on the growing popularity of the use of Twitter and the increasing prevalence of its influence among the financial investment community. This paper presents empirical evidence of the existence of a financial community on Twitter in which users’ interests align with financial market-related topics. We establish a methodology to identify relevant Twitter users who form the financial community, and we also present the empirical findings of network characteristics of the financial community. We observe that this financial community behaves similarly to a small-world network, and we further identify groups of critical nodes and analyse their influence within the financial community based on several network centrality measures. Using a novel sentiment analysis algorithm, we construct a weighted sentiment measure using tweet messages from these critical nodes, and we discover that it is significantly correlated with the returns of the major financial market indices. By forming a financial community within the Twitter universe, we argue that the influential Twitter users within the financial community provide a proxy for the relationship between social sentiment and financial market movement. Hence, we conclude that the weighted sentiment constructed from these critical nodes within the financial community provides a more robust predictor of financial markets than the general social sentiment.

Keywords:

• Twitter
• Sentiment analysis
• Network analysis
• Financial community
• Network centrality
• Volatility
• Regression analysis

JEL Classification:

• G17
• C32
• C53

Notes

No potential conflict of interest was reported by the authors.

1 As the Securities Exchange Commission (SEC) permits tweets as a form of news release, several Twitter accounts have been identified as influential users related to the financial market. For instance, Carl Icahn, a hedge fund manager, has frequently disclosed information on Twitter with nearly 26,000 followers. (Available at http://blogs.wsj.com/moneybeat/2013/08/12/carl-icahn-warns-investors-to-watch-his-twitter-account)

2 On 23 April 2013, a faked tweet from Associated Press Twitter account (since deleted) claiming there had been an explosion at the White House that injured President Obama caused the market reacted accordingly: From 1:08 pm to 1:10 pm, the Dow Jones Industrial average plunged more than 100 points, from 14697.15 to 14548.58. Just as quickly though, it rebounded. By 1:13 pm, it was back above 14,690.

3 Internet-News article: What Keeps Twitter Chirping Along. This article describes Dell’s attempt to use social media for expanding its market effort starting in 2007. Available at: http://www.internetnews.com/webcontent/article.php/3790161/What+Keeps+Twitter+Chirping+Along.htm

4 Tech Crunch article: Twitter Passed 500M Users in June 2012, 140M of Them in the USA. Available at http://blog.twitter.com/2012/twitter-turns-six

5 Statistics-Brain article: Top Websites By Traffic. Twitter is ranked #4 with more than 88 million visitors per month in 2012. Available at: http://www.statisticbrain.com/top-us-websites-by-traffic/

6 Thomson Reuters Presentation: Social Networking for Market Professionals: How is it Changing the Face of Financial Markets.

7 Option Trading IQ article: Top 25 Traders on Twitter. Available at http://www.optionstradingiq.com/top-25-traders-on-twitter/

8 Top FOREX News article: Top 7 News Sources for Financial Trader, Available at http://www.topforexnews.com/top-7-news-sources-for-financial-trader/

9 Sysomos article: Six Degree of Separation, Twitter Style. Available at: http://www.sysomos.com/insidetwitter/sixdegrees/