Reddit Sentiment Analysis for Overnight Price Movement

Reddit: A Social News Aggregator and Forum Network

Reddit is a popular platform for social news, content, and online discussions. Users can submit various types of content, including links, text posts, images, and videos, which are then voted on by other members, influencing their visibility. The site is structured into user-created boards called "subreddits," each dedicated to specific topics, ranging from broad interests to highly specialized communities.

The Impact of COVID-19 on Stock Market Discussions on Reddit

The COVID-19 pandemic has significantly increased the use of online forums, including Reddit, for discussing stock market predictions and rallying around certain securities. This phenomenon has given rise to a rallying effect, where collective enthusiasm or concern about a stock can drive its price movement. One of the most notable examples of this effect was the GameStop (GME) saga, where a Reddit user known as Roaring Kitty played a pivotal role in rallying retail investors to drive up the stock's price.

Challenges for Risk Management

This rallying effect poses significant challenges for risk management in the financial markets. The collective actions of retail investors on platforms like Reddit can lead to sudden and substantial overnight price movements, making it difficult for traditional risk management strategies to anticipate and mitigate these rapid changes.

Context Analytics: Harnessing Reddit Sentiment for Stock Predictions

Context Analytics is at the forefront of utilizing social media sentiment to predict stock movements. By ingesting Reddit messages from various subreddits, Context Analytics gauges the conversation surrounding over 4,000 securities. Using proprietary natural language processing (NLP) techniques built on news articles, tweets, and government filings, Context Analytics scores these messages and standardizes the aggregated sentiment.

Overnight Price Movement

The primary objective of our research is to test the predictiveness of Context Analytics' premarket close Reddit sentiment on overnight price movements. By capturing sentiment from Reddit, we aim to identify potential rallies and their impact on stock prices.

Methodology

For this research, we focused on securities with a price greater than $5. We took signals from the 15:40 EST timestamp, considering only securities with a standardized volume score (SV-Score) above normal (greater than 0). These securities were then grouped into quintiles based on their sentiment scores. Our approach involved entering positions at market close and exiting at the following market open, with daily rebalancing and compounding of returns since the beginning of 2018.

Findings

Our findings indicate a correlation between sentiment and overnight returns when filtering on positive SV-Score securities. There is a monotonic spread among the quintiles, where the highest sentiment quintiles consistently outperformed, and the lowest quintiles underperformed. On average, we receive 210 security signals each day. Specifically, the top sentiment quintile outperformed the bottom quintile by 284% over five and a half years, translating to an annualized outperformance of nearly 10%.

These results suggest that Reddit sentiment can be predictive of overnight price movements and can be leveraged to monitor and manage overnight risk. By capturing and analyzing the sentiment of Reddit users, investors and risk managers can gain valuable insights into potential stock movements and adjust their strategies accordingly.

For more information, visit www.contextanalytics-ai.com or email us at ContactUs@ContextAnalytics-ai.com .