Actually, we do not advocate ignoring any credible data even if, as the in case of the Baltic Dry Freight Index, it began measuring shipping from a region whose economic predominance peaked with the Hanseatic League in the 13th century(google it, if you dare!).
Increasingly, economists, bankers and hedgies are using Twitter and Google trends to attempt to ascertain leading indicators in the broader economy. Yes, sitting at home in your PJs and furry slippers you may be driving European Central Bank policy. How scary is that? A lot less scary than thinking that policy makers were ignoring online activity. JL
The Economist reports:
"ON MONDAY, the Financial Times reported that the Bank of England uses Google Trends to get a real-time snapshot of the economy. Last month, Derwent Capital, an investment boutique, launched a hedge fund that will use real-time analysis of data from Twitter to trade equities and equity indices. As peoples’ economic behaviour increasingly shows up online, will mining the Internet for data improve the decision-taking of policymakers and investors?
On the face of it, using data extracted from Google Trends offers two advantages over traditional data. First, it is available in real time, rather than the middle of the month following the measurement period (at best). Second, real-time data make for higher frequency estimates.
The former clearly represents an improvement. The benefit of the latter is less obvious. Data aren’t knowledge; increasing the frequency of estimates could lead central bankers to focus more closely on variations that aren’t meaningful. As an observation period shrinks, it becomes increasingly difficult to get the proper perspective on longer-term trends and, particularly, on reversals in these trends.
Still, the possibilities for measuring and estimating economic indicators based on data culled from the internet are exciting. The Bank of England found that the trend in searches for real estate agents is a better predictor of future home prices than the surveys carried out by industry groups. With regard to unemployment, the estimates based on searches for "Jobseeker’s Allowance" are as accurate as the actual number of people claiming the main unemployment benefit. The Billion Price Project at MIT produces a daily inflation index based on prices from hundreds of online retailers. The index doesn’t include services, but it’s well-suited to estimating the goods components of the CPI.
Investing presents a different challenge. There are already at least three academic papers that conclude that Twitter data are a source of alpha (returns in excess of the market return). Not surprisingly, Derwent Capital is working with the authors of one of these papers. Alas, that advantage is likely to be short-lived. There are enough quantitative hedge funds out there constantly searching for new algorithms to arbitrage this “Twitter alpha” away. But there is one area in which social networking will provide the fund manager with a competitive advantage: marketing itself as “Europe’s first social-media hedge fund”.
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