Using Facebook’s Gross National Happiness Index (GNH), researchers at Erasmus University in the Netherlands and Scotland’s University of Glasgow found a causal relationship between Facebook sentiment and stock market behavior.
Facebook’s GNH index attempts to estimate the aggregated mood and well-being of the Facebook population by applying automated sentiment analysis to the status updates of millions of users.
The study, which was published in the Journal of Economic Behavior & Organization this month, examined the relationship between daily sentiment on Facebook and trading behavior in 20 countries.
It is most often assumed that stock investors are not affected by sentiment, but the results demonstrate that “sentiment has a positive contemporaneous relationship to stock returns,” suggesting causality from sentiment to stock markets and highlighting the importance of behavioral factors in investing.
Happiness on one day affected stock returns the next. And people who made money in the stock market expressed happiness the following day, which implies reverse causality. “It is unlikely that stock returns on Friday have a strong effect on Facebook sentiment on Sunday,” noted the researchers. Negative feelings were related to “increases in trading volume and return volatility.”
The researchers concluded that sentiment has a causal effect on stock market characteristics in different geographical regions, which provides evidence that stock market movements are affected by emotions, not just cold calculations.