tag:theconversation.com,2011:/africa/topics/investment-theory-6923/articlesinvestment theory – The Conversation2015-12-01T11:05:10Ztag:theconversation.com,2011:article/514322015-12-01T11:05:10Z2015-12-01T11:05:10ZCan Twitter help you beat the stock market?<p>Every day, hundreds of millions of messages are posted on Twitter. Researchers often see this avalanche of data as a gold mine, allowing them to measure in real time the attention, views and feelings of a huge sample of the population. </p>
<p>A number of recent studies have demonstrated how Twitter can be used to anticipate presidential <a href="http://www.aaai.org/ocs/index.php/ICWSM/ICWSM10/paper/viewFile/1441/1852Predicting">elections</a>, <a href="http://journals.plos.org/plosone/article?id=10.1371/journal.pone.0019467">flu outbreaks</a> or <a href="http://www.sciencedirect.com/science/article/pii/S0167923612003880">box-office results</a>. </p>
<p>So could an analysis of Twitter data also help us predict changes in stock prices?</p>
<h2>Two theories</h2>
<p>There are two business theories that indicate Twitter could be useful in forecasting stock markets:</p>
<ul>
<li><p><strong>An “informational” theory</strong>: Information published on Twitter is new, in the sense that it has not yet been incorporated into stock prices. That information can thus be expected to influence the value one could rationally expect for the future cash flows of an asset.</p></li>
<li><p><strong>A “sentimental” theory</strong>: The price of an asset <a href="http://www.jstor.org/stable/2937765?origin=JSTOR-pdf&seq=1#page_scan_tab_contents">deviates</a> from its fundamental value depending on waves of optimism or pessimism, and Twitter enables the measurement of investor sentiment.</p></li>
</ul>
<p>Anecdotally, it is possible to identify some situations where messages posted on Twitter have in fact “moved markets.” For example, on March 30 2015, a <a href="http://www.captaineconomics.fr/-tweet-1-milliard-elon-musk-tesla-motors">tweet from Elon Musk</a> resulted in an increase of Tesla’s capitalization by approximately US$1 billion in just a few minutes. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"582581865682350080"}"></div></p>
<p>A somewhat similar story happened after a 2013 <a href="http://www.captaineconomics.fr/-tweet-carl-icahn-apple-analyse">tweet from Carl Icahn</a> led to increased capitalization of Apple of more than $10 billion.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"367350206993399808"}"></div></p>
<p>But there is a profound difference between after-the-fact analysis of a few anecdotal events and the creation of a real-time, profit-generating trading strategy based on Twitter. </p>
<p>Depending primarily on the number of false alarms generated by a “Twitter strategy” and the speed with which prices are adjusted to reflect new information, the correlation between Twitter and the financial markets can quickly become unusable. </p>
<h2>A matter of ‘feeling’</h2>
<p>Academic research is currently focused on the second line of research, using Twitter as a proxy for investor sentiment. The standard methodology is to extract all tweets containing the name or ticker symbol of a listed company, then algorithmically assign to each message a “feeling” – positive, neutral or negative. </p>
<p>An aggregate rating is then created using the average of the values assigned to the tweets. The next step is to search for any causal link between the “social feeling” and the evolution of an asset’s prices, correcting for the level of risk.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/103483/original/image-20151127-11640-1dkovw2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/103483/original/image-20151127-11640-1dkovw2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/103483/original/image-20151127-11640-1dkovw2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/103483/original/image-20151127-11640-1dkovw2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/103483/original/image-20151127-11640-1dkovw2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/103483/original/image-20151127-11640-1dkovw2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/103483/original/image-20151127-11640-1dkovw2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">A Twitter poster covers the front of the New York Stock Exchange in 2013.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/quintanomedia/10779665214/in/photolist-hqyAUN-6d5irx-83BuMZ-hqziB8-bCUKxf-bCUHQs-qRRYJN-7zB6mY-bCX4Rm-bRP8NZ-bCUopJ-drpzuT-bRPsxa-bRRLEK-bCUpDu-bRP8nk-bRP9PM-bRP8aK-ebum2b-oR28JE-aT1Pve-7Th9X6-gTF4Ep-bgrJsg-4L7c1H-4L7ccr-aT1Qnn-8BC2LF-pQ67Dk-e1oNdk-qwHD5g-dqQof5-6EEFFK-bRPRuc-bCUqhN-bRPtgR-8CFv8N-nwcdmC-62goBJ-bCULAJ-drpKSA-drpKQC-drpzJX-drpKVy-drpL5W-drpL3W-4GkWFg-4Lbpu9-8zga1J-g9iSNL">Anthony Quintano/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>Mixed results</h2>
<p>For now, as for all research on predicting changes in the price of financial assets by using data from the internet and social networks, the results are rather mixed (<a href="http://onlinelibrary.wiley.com/doi/10.1111/joes.12102/abstract">here</a> is a comprehensive review of the literature). </p>
<p>Two recent papers, <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1468-036X.2013.12007.x/abstract">Tweets and Trades: The Information Content of Stock Microblogs</a> and <a href="http://journals.plos.org/plosone/article?id=10.1371/journal.pone.0138441">The Effects of Twitter Sentiment on Stock Price Returns</a>, arrive at essentially the same conclusion: there is a correlation between the “social feeling” for a particular stock and the evolution of financial markets, but not causality. In other words, Twitter is not a crystal ball that can predict markets, but rather a mirror reflecting the current situation.</p>
<p>Research on this subject is still in its infancy, however, partly because of the lack of free historical data and the technical skills required to extract and analyze this kind of unstructured data. </p>
<p>Many methodological and theoretical questions remain unanswered, such as: how can we improve the accuracy of the analysis of the “feeling” of tweets? Is it better to adjust the value assigned to a tweet based on who the sender is? How can we test the “informational” theory using high-frequency data? To decrease the number of “false alarms,” should Twitter signals be combined with other sources of data, such as traditional media or search volumes on Google?</p>
<p>For the moment, however, as the Tweets and Trades study indicates, “picking the right tweets remains just as difficult as making the right trades.”</p>
<hr>
<p><em>Translated from the French by Leighton Walter Kille.</em></p><img src="https://counter.theconversation.com/content/51432/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Thomas Renault ne travaille pas, ne conseille pas, ne possède pas de parts, ne reçoit pas de fonds d'une organisation qui pourrait tirer profit de cet article, et n'a déclaré aucune autre affiliation que son organisme de recherche.</span></em></p>Real-time analysis of Twitter data has been successfully used to predict elections, flu outbreaks and box-office results. So could it also be used on the stock market?Thomas Renault, Enseignant-Chercheur Doctorant, économie & finance, Université Paris 1 Panthéon-SorbonneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/236812014-02-27T09:41:24Z2014-02-27T09:41:24ZGold always glitters but better bargains lie beneath<figure><img src="https://images.theconversation.com/files/42583/original/yf8gdg3c-1393434980.jpg?ixlib=rb-1.1.0&rect=0%2C243%2C2800%2C1898&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Bitter pill.</span> <span class="attribution"><a class="source" href="http://www.flickr.com/photos/8011986@N02/3022614905/sizes/o/">Bill David Brooks</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>Fears over China’s ability to cope with its debt crisis and renewed doubts over recovery in the US have sent investors running back to old faithful: gold. But markets look as if they are favouring tradition over common sense. There are far better boltholes for their money, even among fellow metals.</p>
<p>The gold price has hit a <a href="http://www.bloomberg.com/news/2014-02-25/gold-near-16-week-high-as-rally-seen-overdone-on-taper-outlook.html">four-month high</a> as doubts crept in about America’s consumer-led recovery and markets pondered the possibility that <a href="http://www.cnbc.com/id/101438195">Ukraine might default on its debt</a>. A few days ago it was <a href="http://www.smh.com.au/business/china/fears-of-looming-china-credit-crunch-spark-new-gold-rush-20140217-32wce.html">China’s debt burden that grabbed the attention and drove gold demand</a>. </p>
<p>It’s a familiar story. Gold shares this safe haven appeal with only a handful of other asset types and its value peaks and troughs with the macroeconomic winds. But does it actually make sense for investors to rely on it to protect their capital in fragile times – when countries face the risk of being unable to pay their debts? This question prompted a group of us to explore whether there are some better places for investors’ money, among fellow precious metals as silver, platinum and palladium – the rare metal used in catalytic converters – as well as industrial metals like lead, nickel and zinc. </p>
<p><a href="http://orca.cf.ac.uk/56686/">Our study</a> showed that gold is a strong hedge for sovereign bonds of countries with serious debt issues (for example Greece, Italy and Portugal) and that its safe haven status depends on the magnitude of the extreme negative movement in a country’s bond price. </p>
<p>But more importantly, we found that gold is not the most useful metal for seeking safety in turbulent times. Financial institutions – and individuals blessed with means enough to care – should be considering other precious and industrial metals when things start to get ugly. We even found that industrial metals offered a stronger hedge against adverse movements in sovereign debt prices than gold or any other precious metal.</p>
<p>It’s not too hard to see why; the outperformance of industrial metals in managing the risk associated with with the government bond market can be attributed to their increasing global demand as they chart the upswing in the global economic recovery.</p>
<h2>My precious …</h2>
<p>But it’s not a simple calculation. The safe haven properties of precious metals vary over time. From 1993–2001, our safe haven test indicated that gold is largely a weak safe haven in all markets except Greece. In the period 2001–2006, gold was a strong safe haven for bonds in Finland, France, Germany, Greece, Netherlands, Portugal and the EMU benchmark bond for negative shocks.</p>
<p>Strong, but not the best. A typical portfolio of industrial metals outperforms a portfolio of precious metals and that of all other metals as a hedging instrument against the adverse movement in sovereign bonds. </p>
<p>The simple conclusion is this: all precious metals and many of their more prosaic cousins outperform gold in protecting investors against losses in the sovereign debt market. There is also strong evidence that non-precious metals provide a better compensation for investor losses, particularly in periods of high bond market turmoil. We found that palladium, copper and lead all serve as a strong safe haven as they are able to hedge against a deterioration in credit quality such as that seen during recent financial crises.</p>
<p>So we can still say that gold is a good investment choice during financial crises, but it is evident that there are better alternatives. And more than that, we can say that although all the metals we studied offered protection, investors are actually better off holding industrial rather than precious metals in periods of stormy weather. Maybe it’s not so much a case of following tradition over common sense, but rather a case of sticking with what you know over exploring less popular investment ideas.</p>
<p>Of course, there is some sage investment wisdom about eggs and baskets. And we would say that as the hedging and safe haven performance of gold and other metals vary across bonds, a diversified allocation strategy that manages the bond-metal mix may be necessary to protect investors’ wealth against extreme losses in government bond markets.</p><img src="https://counter.theconversation.com/content/23681/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dimitrios Gounopoulos does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Fears over China’s ability to cope with its debt crisis and renewed doubts over recovery in the US have sent investors running back to old faithful: gold. But markets look as if they are favouring tradition…Dimitrios Gounopoulos, Reader in Accounting and Finance, University of SussexLicensed as Creative Commons – attribution, no derivatives.