A first of its kind study by researchers at the University of Iowa suggests Yahoo's finance message boards have a small degree of ability to predict stock price movements.
The study, "Stock Chatter: Using stock sentiment to predict price direction," also found that more than two-thirds of the message board comments had nothing to do with finance.
The researchers analyzed 70,000 posts by more than 7,000 commenters on Yahoo's finance message boards from April to June 2011. They determined what sentiment, if any, they expressed about 11 Fortune 500 stocks, either bullish, bearish, or neutral. The researchers then looked at the movement of those stocks' prices the next day. Depending on the model the researchers used to classify the statements, they found that the sentiment expressed on the message boards accurately reflected the price movement anywhere between 52 and 64 percent of the time.
Michael Rechenthin, who conducted the study as a doctoral student in the Tippie College of Business, says that while the lower accuracy figures can be attributed to randomness, the 64 percent figure is statistically significant and shows a small degree of predictive ability.
The study found the predictive ability lasted only one day, though, and disappeared on follow up days.
The study also found that only a small number of users produced the largest number of comments, and those comments seem to be responsible for whatever predictive quality the message boards had. Rechenthin says only 3 percent of the commenters wrote 50 percent of the posts during the study period, and 11 percent wrote 75 percent of the posts.
Those extreme users also tended to be the most opinionated, he says, and when they were removed from the study, what predictive ability the boards had all but disappeared. He says the study did not determine whether this was because the most forceful opinions affected stock price, or if those with stronger opinions were more seasoned market observers and able to see trends.
The study also found that, as one might expect of public message boards, many of the posts were completely irrelevant to the topic. They determined that 68 percent of posts were things like advertisements, spam, flame wars, or comments by trolls.
Politics tended to be the most common off-topic topics, he says, with President Obama and former President Bush frequent topics of criticism. The study period also included former Rep. Anthony Weiner's resignation from Congress after texting inappropriate photos, and many comments were related to him.
Rechenthin cautions that as this is the first study of its type and follow up studies will be needed using larger data sets. The research was published recently in the journal Algorithmic Finance and was co-authored with W. Nick Street, professor of management sciences in the Tippie College of Business, and Padmini Srinivasan, professor of computer science at the University of Iowa.
- Rechenthin, Michael and Street, W. Nick and Srinivasan, Padmini. Stock Chatter: Using Stock Sentiment to Predict Price Direction. Algorithmic Finance, 2013, 2:3-4, 169-196 [link]
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