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The Wisdom of Twitter Crowds: Predicting Stock Market Reactions to FOMC Meetings via Twitter Feeds

21 Pages Posted: 31 Mar 2016  

Pablo Azar

Massachusetts Institute of Technology, Sloan School of Management, Students

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)

Date Written: March 11, 2016

Abstract

With the rise of social media, investors have a new tool to measure sentiment in real time. However, the nature of these sources of data raises serious questions about its quality. Since anyone on social media can participate in a conversation about markets -- whether they are informed or not -- it is possible that this data may have very little information about future asset prices. In this paper, we show that this is not the case by analyzing a recurring event that has a high impact on asset prices: Federal Open Market Committee (FOMC) meetings. We exploit a new dataset of tweets referencing the Federal Reserve and shows that the content of tweets can be used to predict future returns, even after controlling for common asset pricing factors. To gauge the economic magnitude of these predictions, the authors construct a simple hypothetical trading strategy based on this data. They find that a tweet-based asset-allocation strategy outperforms several benchmarks, including a strategy that buys and holds a market index as well as a comparable dynamic asset allocation strategy that does not use Twitter information.

Keywords: Social Media, Sentiment, FOMC Meetings, News, Twitter, Event Studies

JEL Classification: G12,G14,E58

Suggested Citation

Azar, Pablo and Lo, Andrew W., The Wisdom of Twitter Crowds: Predicting Stock Market Reactions to FOMC Meetings via Twitter Feeds (March 11, 2016). Available at SSRN: https://ssrn.com/abstract=2756815 or http://dx.doi.org/10.2139/ssrn.2756815

Pablo Azar

Massachusetts Institute of Technology, Sloan School of Management, Students ( email )

Cambridge, MA 02139
United States

Andrew Lo (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-618
Cambridge, MA 02142
United States
617-253-0920 (Phone)
781 891-9783 (Fax)

HOME PAGE: http://web.mit.edu/alo/www

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)

Stata Center
Cambridge, MA 02142
United States

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