Friday, April 26, 2013

Predicting the Stock Market using Big Data

In the paper Quantifying Trading Behavior in Financial Markets Using Google Trends researchers Tobias Preis, Helen Susannah Moat and H. Eugene Stanley have shown that an increase in activity of certain search terms from Google Trends correlates with a decline in stock prices in the Dow Jones Industrial Average (DJIA). The authors then compared investment strategies to show that the search activity isn't just a correlation, but can be used as a valid predictor of market activity.

This graph shows the DJIA on the left, and color codes 3 week periods in the graph according to search frequencies of the word debt. Note that red weeks, like late October of 2008 correspond with declines in the DJIA.  So when lot's of people were searching for the work debt, the stock market went down.

The word Debt was the best performing term in the study.  Notably , it performed better than terms like nyse ,nasdq, and dow jones.

The researchers then compared a Google Trends investment strategy to a basic Buy and Hold strategy and a random Dow Jones strategy.

The results were remarkable.  The Google Trends strategy far exceeded the other strategies.


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