The process of gathering and analyzing Twitter data to predict stock returns EC115. Economics

Transcription

1 The process of gathering and analyzing Twitter data to predict stock returns EC115 Economics

2 Purpose Many Americans save for retirement through plans such as 401k s and IRA s and these retirement plans save money through mutual funds, which are groups of stocks. Sometimes these mutual funds can actually lose money for potential retirees. In 2008, on average, employees lost $10,000 on their retirement savings (Brandon, 2009). Currently, investors seeking information about public entities traditionally gather the majority of their data from financial publications and documents filed by a company with the Securities Exchange Commission, which sources typically contain financial data including revenues, earnings per share, price earnings ratios, cash flows, dividend yields, product launches and company management strategies (Rader, 2006). However, this purely financial approach to market prediction neglects the bullish or bearish sentiments of the public that play a significant role in movement of the market. Due to this total dependence on financial data from investors, stock market predictions are generally inaccurate (Ferri, 2013). By 2008, CXO had collected and graded more than 5,000 predictions and the accuracy of these predictions have stabilized at about 48 percent ever since (Figure 1). Figure 1. Data collected on the accuracy of stock market predictions by the CXO advisory group.

3 Hypothesis The experiment sought a correlation between the calculated social media sentiment value and the stock returns of the company. The hypothesis was that a positive social media sentiment would result in an increase in stock returns and a negative social media sentiment would result in a decrease in stock returns. The null hypothesis was that social media sentiment would have no impact on stock returns. Background Literature Review Social Media is an outlet for instant news which is valuable to investors since accurate news about a company is a reliable predictor of that company's stock value. In one study, principal components analysis was used to reduce the approximately 400 features extracted from social media to about 30 features, capturing about 25% of the variance. An Ordinary Least Squares regression was used to forecast stock price movements from the approximately 30 variables (Sisk, 2013). By conducting these statistical processes on data collected from social media, news metadata can inform short term future price movements and volatility. In a study done by Fisher and Statman (2000), there was no significant relationship between change in sentiment in one month and stock returns in the following month. For large market capitalization stock returns, the relationship was negative for all sentiment groups but never statistically significant. The relationship between change in sentiment during a month and the following month's stock returns was positive for the small market capitalization stocks of the Center for Research in Security Prices (CRSP) 9 10, but that relationship also was not statistically significant.

4 Economists at the University of Rochester, Cornell University, and the University of Texas concluded that individual investor sentiment predicts future stock returns, and that investor sentiment is independent from data involving past returns or past volume (Kaniel et. al, 2004). Furthermore, the trading of these individual investors predicts weekly returns for stocks of all market capitalizations, while data involving past returns are only predictive of stock with a small market capitalization over the same time period. These findings show that the sentiment of the individual investor is highly indicative of the movement of stock price. When the propensity of investors to speculate is high and when the stock is volatile, sentiment is a significant predictor of the fluctuations in the stock price (Baker et. al, 2007). However, when a stock is stable and investors are calm, sentiment has less bearing on the movement of stock price. Using the Facebook's Gross National Happiness Index (FGNHI), which determined the average optimism and pessimism of its users in a particular region, researchers found a significant positive relation between sentiment and contemporaneous stock market returns, showing that optimistic sentiment is related to gains in the market index and pessimistic sentiment is related to losses in the market index (Siganos, 2014). However, the procedure of using public sentiment as an indicator of the market may be flawed since the relation between sentiment and stock returns is subject to reverse causality. For example, when investors profit or loss from the market, those sentiments may be expressed through social media. These specific sentiments are not indicative of what the movement of the market will be tomorrow. Bollen, Mao, and Zeng (2011) investigated whether measurements of collective mood states derived from large scale Twitter feeds are correlated to the value of the Dow Jones

5 Industrial Average (DJIA) over time. They used OpinionFinder to measure positive vs. negative mood and Google Profile of Mood States (GPOMS) that measures mood in terms of 6 dimensions (Calm, Alert, Sure, Vital, Kind, and Happy). Through this process, an accuracy of 86.7% was achieved in predicting the daily up and down changes in the closing values of the DJIA and the Mean Average Percentage Error (MAPE) was reduced by more than 6%. Research Methodology Six companies were chosen for the calculations: Kirkland (KIRK), Zynga (ZNGA), Aramark (ARMK), Foot Locker (FL), Verizon (VZ), and Disney (DIS). These companies were chosen from the Russell Index Member Lists. Kirkland and Zynga were chosen from the Russell Microcap List (Russell Investments, 2011), which lists the stocks of highly successful small companies; Aramark and Foot Locker were chosen from the Russell Midcap List (Russell Investments, 2011), which lists the stocks of highly successful mid size companies; Verizon and Disney were chosen from the Russell 1000 Index List, which lists the stocks of highly successful large companies. These companies were chosen for their varying product fields, their importance to consumer markets, and their distinctive names. A Python program, entitled StockPile was developed. The program asked for a company name to predict the stock price of. Using the Twitter REST API, all the tweets mentioning the name of the specified company in the last eight days was collected. As the Twitter REST API has a rate limit on the number of queries possible per fifteen minute intervals, multiple API accounts were created and cycled through each time one hit the limit. Python s Natural Language Toolkit (NLTk) associated a sentiment and polarity value for each Tweet and the Twitter API associated the number of favorites, the number of retweets, and the number of followers of the

6 author for each Tweet. However, the number of followers metric was removed after its statistical insignificance was noted. The Tweet, with the corresponding data, was stored as a TweetObj Object as shown in Figure 2. The metrics of the TweetObjs were then related with the relevant stock prices of that company with a two day time shift in the future. The TweetObjs were saved in a Pickle file. This process was repeated for each of the tested companies: Kirkland (KIRK), Zynga (ZNGA), Aramark (ARMK), Foot Locker (FL), Verizon (VZ), and Disney (DIS). Figure 2. Class Diagram for the TweetObj class. A Least Squares Multiple regression was conducted on the metrics of the TweetObjs and the stock prices with a certain time shift. The most accurate time shift was determined by conducting a Least Squares Multiple regression on all the different time shifts from a zero time shift to a time shift of a week. Whichever regression model provides the least p value and the greatest correlation coefficient of the predictive model will determine the delay in the sentiment on twitter of a company affecting the stock price of that company. The predictive model with the most accurate time shift will provide an equation to predict the stock price in the following form:

7 [ n C if i ] + K = P t i=1 Where n is the number of features, C i is the coefficient of the feature value, F i is the feature value, K is a constant, and P t is the stock price after a certain time delay. Figure 3. Data Flow Diagram for the StockPile algorithm. After the algorithms were developed, for the following three days, a testing algorithm, encapsulated in testing.py, was run after the markets closed at 3:00 PM EST. This program collected Tweets via the Twitter REST API for a period of one day, and ran the values through the predictive equation to determine a predicted stock price associated with each Tweet. These stock prices were then compared to the actual stock price at the germane time. An R 2 score was then calculated comparing the predicted values to the actual values.

8 Figure 4. Tweets referencing a certain company are collected using the Twitter Streaming API. Each terminal window is collecting Tweets about a certain company. Figure 5. The output the computer program that collects the Tweets and associates them with a stock price is shown above. The output shows each Tweets ID, properties of that Tweet, and the associated stock price with that Tweet. The last line of the output shows the coefficients and the constant for the predicted model. The coefficients are in the brackets. The companies being run

9 in the terminals from the top left terminal to bottom left terminal clockwise are Kirkland, Zynga, Aramark, Foot Locker, Verizon, and Disney. Figure 6. Using the predictive model provided by the previous program, this program tests the accuracy of the predictive model. The R 2 value is shown at the bottom of the terminal window. The companies being run in the terminals from the top left terminal to bottom left terminal clockwise are Kirkland, Zynga, Aramark, Foot Locker, Verizon, and Disney. Results Kirkland (KIRK) Average volume of Tweets per day: 3442 Equation: e 01a e 05b e 02c Where a is the sentiment, b is the number of favorites, and c is the number of retweets Day R 2 Value Day Day Day Figure 7. Data for Kirkland

10 Zynga (ZNGA) Average volume of Tweets per day: 938 Equation: a b c Where a is the sentiment, b is the number of favorites, and c is the number of retweets Day R 2 Value Day Day Day Figure 8. Data for Zynga Aramark (ARMK) Average volume of Tweets per day: 179 Equation: a b c Where a is the sentiment, b is the number of favorites, and c is the number of retweets Day R 2 Value Day Day Day Figure 9. Data for Aramark Foot Locker (FL) Average volume of Tweets per day: 1103 Equation: a b c Where a is the sentiment, b is the number of favorites, and c is the number of retweets Day R 2 Value Day Day

11 Day Figure 10. Data for Foot Locker Verizon (VZ) Average volume of Tweets per day: Equation: e 01a e 05b e 03c Where a is the sentiment, b is the number of favorites, and c is the number of retweets Day R 2 Value Day Day Day Figure 11. Data for Verizon Disney (DIS) Average volume of Tweets per day: Equation: e 01a e 06b e 02c Where a is the sentiment, b is the number of favorites, and c is the number of retweets Day R 2 Value Day Day Day Figure 12. Data for Disney Conclusions The R 2 value is the coefficient of determination. The coefficient of determination is the proportion of the variance in the dependent variable that is predictable from the independent

12 variable. The higher the R 2 value, the datasets are more correlative with an upper bound of 1. The lower the R 2 value, the less correlated the datasets. The datasets compared in this experiment are the sets of predicted stock values using the model based on Tweets, related features, and the actual stock price. All but one of the trials in the experiment had a negative coefficient of determination. This means the model predicted the stock price inaccurately. The Efficient Market Hypothesis states that information relevant to stock price will immediately affect the stock price. Since the social media was highly uncorrelated with the stock price according the values of the coefficient of determination, the Efficient Market Hypothesis proves that information on social media is not relevant to the fluctuation in stock price. The results of this experiment also prove that stock movement follows a Markov Chain. A Markov Chain means that the state of something currently is not related at all to the previous states that it has been in. An extension of this type of movement is a random walk. A random walk is a succession of random steps. In the case of stocks, the movement of stocks can go either up or down. These movements represent the total randomness of fluctuations in the stock market. Nobel Prize winning Economist, Gene Fama (1965) finds that empirical evidence provides strong support for the random walk model. He notes that economists must prove that models can predict prices better than simply randomly choosing buy or sell. As Figure 1 showed, the average accuracy of predictive models is only 48 percent, less than the fifty fifty chance of choosing randomly. The results of this experiment corroborate his findings. The major finding of this experiment was that social media is irrelevant to determining stock returns. Further research to seek a correlation between Social Media and stock returns may include taking into account longer periods of time for data gathering and testing, using more sensitive natural

13 text analysis tools, and calculating based on a time shift, with an assumption that sentiment data from the previous days would impact future days.

14 Bibliography Baker, M. and Wurgler, J. (2007). Investor Sentiment in the Stock Market. Bollen, J., Mao, H. and Zeng, X. (2011). Twitter mood predicts the stock market. Journal of Computational Science, 2(1), pp.1 8. Fama, E. (1965). Random Walks in Stock Market Prices. Financial Analysts Journal, 21(5), pp Brandon, E. (2009, February 12). How Did Your 401(k) Really Stack Up in 2008? [online] US News. Available at: did your 401k reallystack up in 2008 Ferri, R. (2013). It's Official! Gurus Can't Accurately Predict Markets. [online] Forbes. Available at: official gurus cant accurately predictmarkets/ [Accessed 28 Dec. 2014]. Fisher, K. and Statman, M. (2000). Investor Sentiment and Stock Returns. Financial Analysts Journal, 56(2), pp Kaniel, R., Saar, G. and Titman, S. (2004). Individual Investor Sentiment and Stock Returns. Li, X., Xie, H., Chen, L., Wang, J. and Deng, X. (2014). News impact on stock price return via sentiment analysis. Knowledge Based Systems, 69, pp

15 Minh, D. (2013). Sentiment and Influence Analysis of Twitter Tweets. US A1. Paniagua, J. and Sapena, J. (2014). Business performance and social media: Love or hate?. Business Horizons, 57(6), pp Rader, J. (2006). Method and system for conducting sentiment analysis for securities research. US A1. Russell Investments, (2011). Russell 1000 Index Member List. Washington: Russell Investments. Russell Investments, (2011). Russell Microcap Index Membership List. Washington: Russell Investments. Russell Investments, (2011). Russell Midcap Index Member List. Washington: Russell Investments. Siganos, A., Vagenas Nanos, E. and Verwijmeren, P. (2014). Facebook's daily sentiment and international stock markets. Journal of Economic Behavior & Organization, 107, pp Sisk, J. (2013). Methods and systems for predicting market behavior based on news and sentiment analysis. US A1.

16 Acknowledgements We would like to acknowledge and thank several people for providing us with an abundance of support and assistance. We would like to express our gratitude to Dr. Alex Tabarrok of George Mason University, Professor Francis DiTraglia of the University of Pennsylvania, Dr. Andrew Lo of the Massachusetts Institute of Technology, and William Li of the Massachusetts Institute of Technology for their highly supportive feedback on the Economic and programming side. We would also like to thank Dr. Csaba Gabor and Mr. Phillip Ero of the Thomas Jefferson High School for Science and Technology for providing us with support in understanding our statistical analyses. We are grateful to our lab director, Dr. Dan Burden of the Thomas Jefferson High School for Science and Technology, for patiently and proactively ensuring that we had everything we needed to conduct our experiment. Finally, and most importantly, we want to appreciate our families for their unparalleled support.