Is there anything Twitter cannot do? Is there any human activity that is beyond Twitter’s ability to influence in 140 characters or less?
So far, Twitter has brought down governments, killed and saved brands, destroyed well-crafted public reputations and helped at least one minister of state self-destruct in spectacular fashion.
If anything of note happens anywhere in the world, it probably gets reported first on Twitter. No longer is it the TV van that is the first at the scene. It is the guy with the mobile phone.
And now it appears that Twitter can predict the stock markets as well.
On Monday, a team of researchers from the Technical University of Munich published a study that shows that “sentiment from Twitter messages develops similar to the stock market and even leads by a day”.
In other words, Twitter can tell you how a stock is going to perform well before the fact.
Timm Sprenger and Isabell Welpe, both economists, studied 250,000 tweets pertaining to S&P 500 companies over the first half of 2010. Their results show that investing on the basis of Twitter sentiment would have generated average rate of returns of up to 15%. (At the time of writing this the S&P 500 provides a year-to-date positive return of 5.96%.)
On the face of it, this might seem pretty impressive. A device that can foresee the future sentiment of the stock market, even if it is in 24-hour windows, is the sort of thing most investors would kill for. Traders pay top dollar for access to Bloomberg terminals, fundamentals, technicals, religion and astrology that can help them make more money.
And here is this micro-blogging service that seems to do it for free.
But in fact, Twitter is the perfect tool to measure sentiment. As the researchers mention in their study, Twitter is designed to distil out popular sentiment: “users providing above average investment advice are retweeted (i.e., quoted) more often and have more followers, which amplifies their share of voice”.
Sprenger and Welpe have now launched a site, www.tweettrader.net, to showcase their prediction skills.
Hopefully the first to take some of their advice could be Twitter itself. The service is yet to reveal a viable business model. While they work on one, dabbling in some stocks might help.
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