Predicting stock markets with words

Forecasting the future can make a poor man rich on Wall Street.What instruments you rely on to estimate where stock markets willgo depends on your taste and expertise. Two Irish researchersnow added another tool. It measures how homogenous the language isthat financial analysts and journalists use when writing aboutfinancial markets.
Aaron Gerow (Trinity College, Dublin) and Mark Keane (UniversityCollege Dublin)
Expressions like ‘stocks rose again’, ‘scaled new heights’ and’soared’ are then most frequently used. In another observation,Keane remarks that “[financial reports] also appear to refer to asmaller-than-usual set of market events – presumably because of anincreased fixation on a small number of rapidly rising stocks.”Reporting on ever-rising stocks from Google and Apple becomes veryfashionable accordingly.
Directly after the market bubble busts, this trend is reversedand as the stock market falls, journalists’ language becomes morediverse. Why this would occur is not completely clear to the Irishresearchers. “Maybe it’s a bit like happy families are all happy inthe same way, but unhappy families are unhappy in many differentways,” says Keane referring to a quote from the Russian writerTolstoy.
Plotting their frequency indicator together with the Dow JonesIndex becomes more insightful. The red line depicts the frequencydistribution of words used by financial analysts and reporters. Thelower the red line, the less similar the language used. The stockprice index, meanwhile, is represented by the blue line.
Source: Aaron Gerow and Mark Keane, “Mining the Web for the’Voice of the Herd’ to Track Stock Market Bubbles”
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