September 14, 2011
Facebook, Happiness, and the Stock Market
Color me skeptical, but I haven't looked at it that closely. Yigitcan Karabulut has. Here is his abstract for a draft paper, Can Facebook Predict Stock Market Activity?:
This paper revisits the relation between investor sentiment and stock market activity using a novel and direct measure for sentiment. Specifically, I use Facebook's Gross National Happiness which captures investor sentiment on a daily basis using content from the individual status updates of almost 100 million Facebook users in the US. I document that Facebook sentiment has the ability to predict statistically significant and economically meaningful changes in the daily returns and trading volume in the US equity market. For instance, a one-standard deviation increase in Facebook sentiment predicts an increase in market returns equal to 12 basis points over the next day. Moreover, I also find an incremental ability of Facebook sentiment to forecast returns among small-cap and growth stocks that is consistent with the noise trader models.
Of course, I can't look at it very closely, because the paper is not available on SSRN (just the abstract), but an overview of the paper is available here, via CXO Advisory Group, LLC. CXO runs their own, simplified test, concluding that
evidence from simple tests on available data indicates little or no power for changes in Facebook Gross National Happiness for the U.S. to predict U.S. stock market returns.
Either way, given the enormous influence of social networking, it would seem something could be learned. I'm more interested in the micro-level impacts. I'd be curious to see the impact of key corporate information being disseminated via Facebook or Twitter. And whether a company have any effect on the market response to key information releases by controlling some aspect of social networking and related discussions. I'm sure some companies are looking into, but I suspect they aren't going to share what they find.
Great article by Yigitcan, but I'm not convinced.
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