Thanks to the musical choices made on Spotify, we can anticipate stock market prices

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We like to think that our purchasing decisions are based on facts and rational calculations, but it turns out that they are also influenced by our emotions. When we spend a lot of money on a meal, clothes or electronic gadgets, are we really calculating the costs and benefits or are we responding to a stress, frustration, excitement or joy of the moment?

The same question arises for the financial markets. Efficiency theory postulates that prices result from rational calculations. But traders are human beings, and human beings are subject to emotions. Do these emotions affect trading decisions and, by aggregation, stock prices?

Studying this question remains difficult because, although the emotions of individuals translate into visible actions (aggressive behavior or language, for example), they are not directly observable. With the advent of big data, and more particularly data on the musical choices of people who use Spotify, it is however becoming possible to measure the average mood of individuals in a country, and to link it to price movements. stock Exchange.

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Our research, published in the Journal of Financial Economics, is based on the idea that there is a match between an individual's musical choices and their mood. By using the average positivity of music listened to on Spotify by individuals in a country, we can therefore construct an indicator of the average sentiment of investors in the country, and we show that the latter predicts variations in the price of the national stock market index.

Capturing the mood

Investor “sentiment” can be defined as the average mood of investors about a market or asset. In other words, it is a willingness to buy or sell that cannot be explained by fundamentals.

A large number of possible measures of this feeling exist. However, consumer confidence, a country's growth, the level of unemployment or even the number of deaths and cases of Covid-19 have direct effects on the economy, which makes it impossible to clearly identify the role of emotions. When consumer confidence increases, it directly affects financial markets through better fundamentals (better sales expectations), not just through positive sentiment.

We show that our results are not the product of just one of the forty countries in our sample. Consistently, we also show that an improvement in investor sentiment is associated with excess purchases of equity mutual funds.

Our research is not aimed at discovering a profitable trading strategy. On the other hand, we show that emotions do affect stock markets. These results, among others, invite investors to pay attention to their own emotions when making investment decisions or trying to understand changes in stock prices, especially during periods of speculative bubbles.

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Our study also sheds light on the role big data can play in aggregating and measuring investor sentiment. Spotify's music data, with its great international comparability and daily updating, makes it possible, in real time, to measure the sentiment of investors in a market.

This article is republished from The Conversation under a Creative Commons license. Read the original article.