Measuring the Effect of Short-Term Social Sentiment on Stock Market Correlation Structure (whitepaper)

BY TYNAN OVERSTREET

We studied the effect of Short Term Social Sentiment on intraday correlations between individual stock symbols and the S&P 500 (as measured using SPY as a proxy). The data suggests a strong relationship between the current level of social activity and future price correlation on an intraday basis.

Portfolio optimization is based on the effect of diversification between a group of assets; undetected changes in correlation can thus expose market practitioners to unwanted price risk. This implies substantial benefits to incorporating social data into risk management and trading applications.

“The results imply that when social activity is high in $SPY, the correlation of $SPY increases with a broad range of individual stock symbols and ETF’s.”