9.9.2021 | 04:53
Although we measure like to believe that our purchases are base on facts and rational calculations, the truth is that they are often influence by emotions. Are we thinking in terms cost and benefit when we spend on expensive food, clothes, and electronic gadgets? Or are we reacting to stress, frustration or joy?
Financial markets can also be subject to the same logic. The efficient markets hypothesis claims that stock prices driven purely by rational calculations. However, traders are humans and emotions can affect their decisions. These emotions reflected in the stock market?
This because emotions can’t be observe. Although emotions can be observe in actions, not all actions e.g. aggressive behaviour or language can be capture by data. What if you could measure the mood in a country, and then link it to financial market behaviour? This is possible thanks to Spotify.
The Journal of Financial Economics published our research that used music as a measure of national sentiment and market behaviour. This research is based on the idea of mood congruence, where music choices can reflect people’s moods. For example, sad songs at funerals or happy songs at parties.
Spotify offers aggregated listening data for a country as well as an algorithm to classify the positive or negative aspects of each song. These inputs are use to calculate music sentiment, which is a measure the country’s overall sentiment express in the positiveness of its citizens songs.
What Is The Most Common Way To Measure Sentiment?
Investor sentiment can be define as the general feeling among investors about a market or asset. Although this definition is well-accept, it is difficult to find an accurate measure that isn’t influence by economics poker pelangi.
Natural measures such as consumer confidence, GDP growth and unemployment have direct economic impacts. For example, an increase in consumer confidence may not necessarily mean that emotions are directly affecting the stock market. The rise could instead be explain by an improvement in business and employment conditions on which the index is based. Another option is to search for other mood indicators that can be use as indicators of national sentiment.
Research on investor sentiment used shocks to measure national mood, but not the economy. This includes the results of major sporting tournaments. Other factors can also affect mood. A country might lose a sporting game, but also experience falling COVID cases. Our alternative method of measuring mood using Spotify data is to use national Spotify data.
Music Can Use To Measure Emotions
Music listening data can be problematic because people might choose to listen to music that is not suited to their moods, such as upbeat music to soothe a low mood. This is not true, as we show. Music sentiment is stronger during longer, sunnier days. These are high-spiritual periods that have been proven to increase mood, according to research.
Our study is unique because it identifies a measure that reflects a national mood. Regardless of the cause, whether it was soccer results or COVID cases, citizens’ music choices reflect their mood. Spotify listening data has been proven to be more accurate than traditional consumer confidence surveys in predicting consumer confidence.
Stock Markets React Too Strongly To Sentiment
We found that higher sentiment correlates with higher stock market returns. This also results in lower returns the following week, suggesting that the initial reaction to the stock market was temporary. These results could be argued to show a spurious correlation similar to the Super bowl effect, where the winner of the Super bowl predicts the US stock market, even though there is no rationale or behavioural reason for it.
Our results are consistent across 40 countries, and we do not believe that outliers have influenced the data. The result is also robust across all asset classes. Our main results are based on stocks but we also found that high music sentiment associate to greater equity mutual fund purchases. A high music sentiment correlates with lower returns on government bonds. This indicates that investors are switching from safe bonds to risky stocks.
Music Measure Sentiment Is Important
Our study does not aim to identify a profitable trading strategy. We don’t recommend that investors calculate the sentiment of music and use it as a predictor for the stock market. Instead of using a new measure that reflects national sentiment, which is available in 40 countries worldwide, we want to demonstrate how emotions affect the stock exchange. Investors should be aware of their emotions when making investment decisions.
Our research also suggests that sentiment could drive the rise in stock prices for electric vehicles and artificial intelligence products. Investors should avoid buying into a bubble and selling during a crash. This study also demonstrates the power and utility of big data to uncover aggregated ongoing sentiment. Music not only enjoy all the time, unlike sporting events that rare. Music is a universal language that allows us to compare national sentiments around the globe.