Analyzing the impact of investor sentiment on S&P 500 prices using deep learning models

Abstract

Purpose

This study aims to investigate to what extent the predictability of the standard and poor’s 500 (S&P 500) price levels is enhanced by investors’ sentiments extracted from social media content, specifically platform X.

Design/methodology/approach

Two recurrent neural network (RNN) models are developed. The first RNN model is merely based on historical records and technical indicators. In addition to the variables included in the first RNN model, the second RNN model comprises the outputs of the sentiment analysis, performed using the TextBlob library. The study was conducted between December 28, 2011, and December 30, 2021, over 10 years, to obtain better results by feeding the RNN models with a significant quantity of data by extending the period and capturing an extensive timespan.

Findings

Comparing the performance of both models reveals that the second model, with sentiment analysis inputs, yields superior outcomes. The mean absolute error (MAE) of the second model registered 72.44, approximately 50% lower than the MAE of the technical model, its percentage value, the mean absolute percentage error, recorded 2.16%, and finally, the median absolute percentage error reached a value of 1.30%. This underscores the significant influence of digital platforms in influencing the behavior of certain assets like the S&P 500, emphasizing the relevance of sentiment analysis from social media in financial forecasting.

Originality/value

This study contributes to the growing body of literature by highlighting the enhanced predictive power of deep learning models that incorporate investor sentiment from social media, thereby advancing the application of behavioral finance in financial forecasting.

Citation

Khalife, D., Yammine, J., El Bazi, T., Zaki, C. and Jabbour Al Maalouf, N. (2024), "Analyzing the impact of investor sentiment on S&P 500 prices using deep learning models", Journal of Financial Reporting and Accounting, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JFRA-06-2024-0384