Twitter is being heralded as a strong guide to stock-options pricing by UConn researchers. It’s also being touted as the largest knowledge base of free investment advice.
The study, “Twitter volume spikes and stock options pricing,” was published recently in the journal of Computer Communications. It reveals how spikes in the number of tweets about a company can be used to design a profitable stock options trading strategy.
The study determined that extreme stock-price swings were correlated with Twitter volume spikes, as sharp increases or decreases in returns triggered more discussions about them, and hence more tweets. The researchers reported that stock prices are very volatile in the days around the stock’s Twitter volume spike, particularly the days immediately before and after the spike.
“Our study is the first that analyzes the relationship between Twitter volume spikes and stock options pricing,” said Bing Wang, associate professor of computer science and engineering, one of three authors on the paper. Co-authors were Wei Wei of FinStats.com, a big data analysis company, and Yuexin Mao, a UConn Ph.D. student in computer science and engineering advised by Wang.
According to the researchers, traders, investors, financial analysts, and news agencies, for example, post tens of thousands of tweets daily related to stocks, making Twitter the largest knowledge base of free investment advice about the financial markets that is available to everyone instantly and easily.
Wang said the researchers’ goal was to investigate whether Twitter volume spikes could shed light on the behavior of stock-options pricing. As more investors have learned about the versatility of options – big profits can be made when the stock goes up, but also when it goes down – options trading has become an increasingly popular way for active traders to make bets on the direction a stock may take, or to hedge existing positions in their portfolios.
