European Central Bank says Twitter can predict which direction stocks are heading

 
Jessica Morris
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Twitter chatter is a good predictor of stock price movements (Source: Getty)

Market mavens should keep an eye on Twitter if they want to know which direction their stock picks are heading, or at least that's what recently published research conducted by the European Central Bank has found.

Researchers crunched over 310,000 tweets between 2010 and 2012 containing the words "bullish" or "bearish" - because these are generally used exclusively in relation to what investors think about future market movements.

"Twitter bullishness has a statistically and economically significant predictive value in respect of share prices in the United States, the United Kingdom and Canada," it said.

They said that Twitter can be a better predictive tool for stock market movements than search engine Google, as well as some surveys. But they did note that Twitter only increases returns "on the following day, with there being a return to normal levels within the next to to five days.

And additionally Twitter's predictive powers become noticeably better in "extreme market conditions" such as the global financial crisis which ripped through markets around eight years ago.

"Interestingly, this is particularly the case in extreme market conditions. For example, Google bullishness touched bottom in mid-2008, before the market turmoil of late 2008 and early 2009 in the United States, United Kingdom and Canada".

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