The stock-market cliché “buy low, sell high” may need to be tweaked. Newly published research suggests there is value in buying high—if “high” refers to the spirits of a given country, as identified through its Facebook posts.
That’s the conclusion of a team of researchers in Scotland, Australia, and the Netherlands, who cleverly combine a new obsession (big data collected from social media) with an old one (making money in the market).
They present evidence not only of a link between market activity and a society’s emotional state, but of apparent causality. In short, the national mood, as reflected in Facebook status updates, is positively related to how the stock market performs the next day.
Widely expressed negative emotions "are related to increases in trading volume and return volatility."
“These results highlight the importance of behavioral factors in stock investing,” the researchers, led by Patrick Verwijmeren of the University of Glasgow, write In the Journal of Economic Behavior and Organization.
Verwijmeren and his colleagues, Antonios Siganos and Evangelos Vagenas-Nanos, utilized data from Facebook’s “Gross National Happiness” index. First instituted in 2009, it estimates the emotional state of various nations by analyzing the percentage of positive and negative terms used in status updates.
The researchers excluded messages that ranked above the 99th percentile in terms of happiness, arguing “these typically relate to messages like ‘Merry Christmas’ and ‘Happy New Year,’ and aren’t necessarily reflective of people’s actual sentiments.”
They collected data in March 2012 from 20 countries, including the U.S. and U.K, Argentina, Australia, Singapore, South Africa, and Spain. They then compared these expressions of happiness or unhappiness with the next day’s stock market returns in each nation.
They found a positive relationship between Facebook sentiment on a given day and stock market returns the following day. In addition, they found widely expressed negative emotions “are related to increases in trading volume and return volatility.”
Importantly, these patterns held true for emotional expressions on Sunday and returns on Monday. This argues against a “reverse causality” explanation, in which people who make money in the market express more happiness the next day. “It is unlikely that stock returns on Friday have a strong effect on Facebook sentiment on Sunday,” they note.
“Our findings suggest that sentiment has a causal effect on stock market characteristics in different geographical regions,” the researchers conclude. Their study provides further evidence that the movement of the markets is based, to a significant degree, on emotions rather than cold calculations.
You can choose to believe this or not. But if you don’t, your next status update may simply read: “Lost my shirt.”