How much of an effect do social media have on the stock market? Plenty, according to a Purdue study.
Four researchers from Purdue’s Krannert School of Management are studying the extent to which sentiment revealed by traditional media and social media affects the market. They extracted sentiment by conducting a textual analysis of articles published in the Wall Street Journal and Seeking Alpha (www.seekingalpha.com), a very popular financial social media Web site.
Among the findings:
- Seeking Alpha sentiment associates strongly with contemporaneous and subsequent stock returns, even after controlling for Wall Street Journal sentiment.
- That effect is strong for articles more closely followed by market participants and for companies mostly held by retail investors.
- Seeking Alpha sentiment associates with earning surprises.
- A trading strategy based on Seeking Alpha sentiment could generate significant trading profits.
The four researchers are Accenture Professor of Information Technology Prabuddha De, Assistant Professor Yu (Jeffrey) Hu, Assistant Professor Byoung-Hyoun Hwang, and Hailiang Chen, a doctoral student. Their study, which is still ongoing, has been published in conference proceedings by the Institute of Electrical and Electronics Engineers (IEEE), and will be presented in France this June.
De, Hu, and Chen are in the information systems area at Krannert, and Hwang is on the finance faculty. The researchers are looking at the information through different lenses.
“In information systems, we’re very intrigued by social media. Social media enable anyone to publish or access information at a low cost, and they are becoming important market-changing forces,” says Hu, adding that he was “surprised” by the magnitude of the effects the group found.
For Hwang, the data provided the latest information about what drives stock prices. “We’ve looked at traditional outlets in the past, such as CNBC,” he says. “But this is a new channel, and one that hasn’t been extensively studied.”
Click here for a copy of the study.