In an article published last week, Andrew Walmsley talks about some of the studies which indicate that social media is a lead indicator of share-price performance.
Walmsley notes that as players of the stock market are always seeking a lead on rivals and a signs of things to come, it's no surprise that social media monitoring has been seized upon as a potential forecasting tool - people who 'like' a brand, become a fan, discuss it in forums, tweet or blog about it are expressing their interest or approval in dozens of ways.
Walmsley then goes on to describe 3 examples of where there appears to be a statistically significant relationship between the stock price and the buzz that's been monitored:
1. Altman Vilandrie
US based management consulting group Altman Vilandrie conducted a proof-of-concept study in the US, looking at the iPhone 4 antenna problem in 2010. Though only a preliminary study, they found social media to be a good proxy for consumer sentiment as it acted as a lead indicator both for the stock-price decline and news sentiment. It was also more reliable than online news sources, which lagged behind and were sometimes sensationalist in tone.
2. Pace University and Famecount
Pace University in New York collaborated with Famecount, the social analytics company, in a study to examine the relationship between the stock prices of Coca-Cola, Starbucks and Nike and the number of fans they had in social media. All three brands were shown to display a significant correlation and a relationship that worked on a 10- to 30-day lag of stock price to social media, making it a useful predictive tool.
3. Sntmnt.com
A start-up stock market and trend analysis company called Sntmnt.com, based in the Netherlands, is applying machine learning to pick out the correlations between 10,000 buzz sources and the stock prices of 25 funds on the Amsterdam exchange. Early results from the beta stage claim 56% accuracy in its predictions.
What is interesting about these studies, as Walmsley points out, is that if the market starts to believe that buzz is a predictor of stock performance, then whether this is real or not ceases to matter; buzz spikes will start to be reflected by jumps in stock prices as traders begin to follow the metrics.
Obviously we shouldn't take anything as read just yet as these studies are still in the early days of examining the influence of social media on share prices, but it will be interesting to see if anything more develops over the coming months.