FAISHAL AHMAD FARROSI

29015011
MSM ITB 2015

Faishal Ahmad Farrosi 29015011

The Effects of Stockbit.com on Stock Price Returns

QUATITATIVE
FINAL EXAM
Abstract

Information has become one of the most sensitive issue that investors and traders always seek
for. Retail trader has limited access to information compared to institutional traders who
conduct their own research. The limitation of information force retail trader to look for
information from internet. One of the source is stockbit.com. Stockbit.com is a social media
for retail trader where they can exchange opinion, share information, and discuss about
stocks. But the issue is on the reliability of information from stockbit.com. Can other retail

The
Effects
of Stockbit.com
Stock
Price
Returns
trader
actually
trust the information
from stockbit.comon
or not.
To check
the reliability
of
stockbit.com this research wants to check if sentiments from stockbit.com can affect stock
price returns.

1. Introduction
Stock Market is always an interesting place to gain wealth. A place to buy or sell
stock from listed company can turn nobody to a millionaire. The potential gain of stocks
invites people to invest or trade on the stock exchange. The benefit from buying stock is
getting dividend and the gain in the value of stock prices. A stock could gain more than
100% in a year which is very fast compared to other investment instrument such as
bonds and deposits.
Stock market comprise of a group of buyers and a group of sellers. Although the
potential gain from trading stock is big, there is also risk on losing while holding stocks.
The risk and return of a stock market is caused by market inefficiencies where everyone
on the market has unequal information. A stock that price some people think will goes
up, others think will fall. People with same information tends to group and create herding
behavior. Herding Behavior is impulsive mental behavior in response to the actions of
others (Prechter, 2001).
The condition of current stock market is far from efficient market hypothesis where
all stocks are priced equal to all of its investment properties from the knowledge that all

Quantitative Research Method Midterm Exam

Faishal Ahmad Farrosi 29015011

market participants possess equality (Fama, 1970). Not every trader has the same
information. And retail trader has limited source of information compared to institutional
trader who conduct their own research to stock listed company. The limited source of
information force retail trader to look on the internet. In Indonesia, there is one social
media that specially made for retail trader to share information, exchange opinion, and
discuss stocks which called stockbit.com. Stockbit is a growing social media since it
already has seventeen thousand active members. These users interact to each other by
posting messages like tweet. Stockbit also has page for every stock listed in Bursa Efek
Indonesia so everybody who want to discuss about the stock can post messages on that
specific stock page. It has a lot of information and the good thing is that all of these
information is collected on one page so retail trader doesnt really has to bother looking
for other source of information.
The problem of internet information sometimes come from the reliability. The same
issue applied on stockbit.com where researcher still questioning the reliatbility of
stockbit.com.
1.1.

Topic Area/ Statement of the Problem

Indonesia is one of the most growing stock market in ASEAN. For period 2004 to
2012, Indonesia Stock Exchange has growing for more than 500% which is higher than
other ASEAN country which grow around 200%. In Indonesia Stock Market, there is one
famous indices called LQ 45. LQ 45 is an index that summarizes the movement of 45
most liquid stocks traded in Indonesia Stock Exchange. Since it is heavily traded, it can

Quantitative Research Method Midterm Exam

Faishal Ahmad Farrosi 29015011

be easier for researcher to find the pattern of herding behavior and detecting irrational
exuberance.
Stockbit is a trader social media that frequently used by trader to share their thought
on certain stocks. Researcher wants to check the reliability of stockbit.com information
by checking if information from stockbit.com can give an increase in stock pric. By
analyzing Stockbit researcher want to measure the behavioral finance of traders and
check if sentiments from stockbit.com can affect stock price returns.

1.2.

Purpose of the Study/ Objectives

Nobody wants to experience losses. But in a stock market with high volatility and
herding behavior in Indonesia Stock Exchange, it is hard not to get biased on stock
buying decision. This study is conducted to check if information from
stockbbit.com is reliable and can affect stock prices and stock returns. By using
data mining and text mining on social media, it is possible to see people behavior
thus this research can show if traders have already biased from the fundamental
price. This study purposes to give explanation on the relationship of Social media
sentiments and LQ 45 Stock returns. The researcher also analyzes the significance
of Stockbit sentiment to Indonesia Stock exchange and the possibility for policy
maker to anticipate anomalous stock market behavior through Stockbit users
sentiments.

1.3.

Research Questions or Hypotheses

Research Question:

a. Do Stockbit.com users sentiment can affect the stock market return?

b. Do retail traders should follow the sentiments from stockbit.com users?
c. Do Policy maker should use stockbit.com users sentiment to anticipate anomalous
stock market behavior?

Hypotheses:

Quantitative Research Method Midterm Exam

Faishal Ahmad Farrosi 29015011

H1: Stockbit.com users sentiment can affect the stock market return.

H2: Retail traders should follow the sentiments from stockbit.com users as it can give
positive return.
H3: Policy Maker should use stockbit.com users sentiment to anticipate
anomalous stock market behavior

2. Literature Review/ Theoretical Framework

People has needs and they need money to fulfill their needs. People work to earn
money and safe their money in banks. But nowadays banks are no longer effective place
to keep money since their interest rate are below Indonesian Inflation. That is why
Indonesian begin to invest their money on stock market. According to Bodie (2001)
investment is the commitment of money or other resources in the expectation of reaping
future benefits. One of the investment instrument is stock. Stock is a form of intangible
assets that is issued by companies as ownership share. Each share of common stock
entitles its owner to one vote on any matters of corporate governance that are put to a vote
at the corporations annual meeting and a share in the financial benefits of ownership
(Bodie, Kane, Marcus, 2001). A stock can give two financial benefits to its owner, stock
dividend and capital gain. Capital gain is the additional value of stocks because of the rise
of its price. Capital gain can be obtained if we buy at low price and sell at high price. But
it is not as easy as it seems since stock market has market inefficiencies where people has
different level of information. The real condition of current stock market is far from
efficient market hypothesis where all stocks are priced equal to all of its investment
properties from the knowledge that all market participants possess equally (Fama, 1970)
Information is the major source of profit. In an inefficient market, traders with more
information will have more gain than those who dont know the information. But not all
information can be right. Some information can be bias as people tend to have irrational
thinking which usually occurs on a bullish trend stocks, a wishful thinking that bullish
trend will never go down can cause bubble to the stocks (Shiller, 2001). The more
irrational traders, bubble will get bigger, and holding stocks will also be riskier. But the
reality is completely the opposite. The more irrational traders, other traders will follow to
buy the stocks in expectation that the stock price will continue growing. This is a proof of

Quantitative Research Method Midterm Exam

Faishal Ahmad Farrosi 29015011

herding behavior where traders behavior tends to follow what other traders do (Prechter,
2001). If the price has grown until it exceeds its fundamental value, the stock value will
eventually burst and the price will go back to its fundamental value. Bubble is a
dangerous phenomenon which if traders fail to identify will cause them major loses.
Identifying reliable information can be tricky since it can be manipulated easily on
internet. As a social media, following other stockbit.com users recommendation can also
be tricky whether it is based from rational thinking and trusted information or not.
Neoclassic economic theory assumed that every person is thinking reasonably. But the
fact is the rationality of real investors is bounded by biases, heuristics, and other cognitive
limitations. Behavioral finance study the effects of psychological, social, cognitive, and
emotional factors on the economic decisions of individuals and institutions and the
consequences for market prices returns (Lin, 2011). Behavioral finance is a relatively new
branch knowledge from economy. It combines behavioral and psychological theory with
neoclassical economics theory and finance to explain why people make irrational
financial decisions.

Quantitative Research Method Midterm Exam

Faishal Ahmad Farrosi 29015011

Behavioral

finance

deals

with

gathering and using information. To get a

crystal clear view of behavioral finance in
Indonesia stock market, this research
conduct text mining from the traders
social media, stockbit. Stockbit is a social
media platform specifically made for
stock traders. Traders can share their
opinion, charting, and information to
others. Hubbert Fromlet (2001) conclude
that it is important for traders to do
heuristics

approach

on

information

provided since more information is spread

faster, life for decision-makers in financial
markets has become more complicated.
The same thing happens in Stockbit. Since
everybody can post their opinion and
news which we dont even know what is
Figure 1. Stockbit Retail Trader
Opinion

the source, it can mislead other traders

plan. The concept of institutional trader

and retail trader also can be seen in Stockbit when the member of Stockbit, retail trader,
think the right time to buy, the stock goes down. It shows that Stockbit has also proven
contrarian investment strategy by David Dreman (1998). The possibility of knowledge
discovery from Stockbit make this study possible to learn the behavior of traders in
Indonesia. According to Don Turnbull (2002) the process of knowledge discovery of
behavioral models from information on the world wide web can be done using Data
mining.
Text mining is a branch in data mining. Text mining is used to find interesting or
useful patterns in textual data and information, and combines many of the techniques of
information extraction, information retrieval, natural language processing, and document
summarization (Hearst, 1999). It is widely used to develop knowledge links and
knowledge sharing among people. The information collected from text mining then
analyzed using machine learning or so called data mining. Data mining involves

Quantitative Research Method Midterm Exam

Faishal Ahmad Farrosi 29015011

application of specific algorithms for identifying interesting structures in data where

structure designates patterns, statistical or predictive models of the data, and relationships
among parts of the data (Fayyad and Uthurusamy, 2002). Data mining help extracting
useful textual patterns, key sentences serving as conclusion and data models, in this study
is behavioral model, for prediction and classification. Thus using data mining can
generate traders behavioral model and can be used to check the existence of irrational
exuberance in a rapid stock price rise.
State Of The Art

Literature

Method

Research Scope

Findings

Empirically

Behavioral

Stock associated with public

price reaction to

measure the effect

finance

news,

public and private

of

information

public information

Vega

C.

Stock

private

and

and

low

coverage

media

experience

insignificant drift

to stock market
(2006).

Da Z, Engelberg J,

Direct measure of

Behavioral

An

Gao P. In search of

investor attention

Finance

predicts higher stock prices

attention

using

search

frequency
google

to

increase

in

queries

in the next two weeks.

in
stock

performance

Zheludev I, Smith

Sentiment analysis

Behavioral

Twitter

R, Aste T. When

method to quantify

finance

lead financial markets in

Can Social Media

and

Lead

validate

Markets?

Financial

statistically
social

sentiment

statistically

doesnt

significant

manners

media analytics

(2014)

Quantitative Research Method Midterm Exam

Faishal Ahmad Farrosi 29015011

Gabriele Ranco et

Consider

al. The Effects of

volume

Twitter Sentiment

sentiment

on Stock

stock

twitter
and
of

Behavioral

Sentiment polarity of twitter

finance

peaks implies the direction

30

of

companies

cumulative

abnormal

returns

from DJIA with its

Price Returns

stock return

(2015)

Mao Y, Wei W,

Investigate

Wang B, Liu B.

number of tweets

Correlating

mention S&P 500

market indicators at each

500 stocks with

stock

level

Twitter data

correlation to S&P

S&P

daily

with

Behavioral

Daily number of tweets is

finance

correlated with certain stock

500 stock indicator

Previous research has conduct behavioral finance study on social media and try to prove the
correlation between internet information with stock prices. The differentiation between this
research with previous research is located on the source of information. On the latest
research, researcher try to test the correlation between twitter and stock prices and mostly it
has insignificant level of confident. It might be caused by the possibility of information bias
from twitter is very high since everybody can actually post a tweet and put a stock name on it
while the user actually doesnt know anything about the stock. This research try a more
specified social media, stockbit.com, which specially made for retail traders so everybody
came from a same background and has the experience and basic knowledge of stock trading.
By analyzing the sentiment from stockbit.com to the stock price, researcher expect it can be a
reliable source of information for retail trader and policy maker.

3. Methodology
3.1.

Research Framework
Research Question

Quantitative Research Method Midterm Exam

Preliminar
y Question
Research
Study

Faishal Ahmad Farrosi 29015011

Literature Review

Pattern Identification

Data

Text Mining on
stockbit

Collection

Process data using data

miner
Data Analysis using time
series

Conclusion

3.2.

Introduction
Behavior is hard to measure which is why it is quite hard to gather the data using
questionnaire since it can lead to bias. To capture unbiased data of people behavior,
researcher choose to use data mining. Data mining is an analytic process designed to
explore data (Usually large amounts of data) in search of consistent patterns and/or
systematic relationship between variables, and then to validate the findings by
applying the detected patterns to new subsets of data (Hajizadeh et al., 2010).
The process of data mining consists of three stages:
1. The initial exploration
2. Model building or pattern identification with validation
3. Deployment
The data gathered from data mining is then analyzed using time series analysis.

3.3.

Research Methodology
This research is conducted using data mining to collect the data and used for
sentiment classification. Then it presents the methods used for the correlation analysis
and granger causality as used by Gabriele Ranco,2015. Finally, the researcher
summarizes the event study methodology by presenting the detection of events, the
categorization of events based on stockbit.com sentiment, and the statistical validation
of the cumulative abnormal returns.

3.4.

Research Design

Quantitative Research Method Midterm Exam

10

Faishal Ahmad Farrosi 29015011

Causal Design is used to develop this research. This type of research is used to
measure what impact a specific change will have on existing norms and assumptions.
Researcher seek causal explanations that reflect tests of hypotheses.

Figure 3.1 Relationship Model Planning

3.5.

Population and Sample

This research is set to examine the behavior of retail trader since retail trader typically
has less information than institutional traders. Population of this research is retail
traders of Indonesia Stock Exchange. There are currently 420.000 retail traders
registered on Indonesia Stock Exchange (BEI, 2015).
The sample of this research are retail traders that registered as stockbit.com users. The
total amount of retail traders registered on stockbit.com are 17.000 people. This
research also specified only for stocks listed on LQ 45 index as it is the most traded
stocks on IDX so generally retail traders know these stocks.

3.6.

Data Analysis
Before run the data mining, the researcher need to make pattern identification for the
data miner. Association rules is then used after the data gathered by data miner.

Quantitative Research Method Midterm Exam

11

Faishal Ahmad Farrosi 29015011

Association rule is a popular and well researched method for discovering interesting
relations between variables in large databases. (Hajizadeh et al., 2010). Granger
causality time series analysis is also used to investigate if users sentiments on
stockbit.com can lead to increasing stock return.
Stock Return Data

Stock Return data is calculated by substracting stock price of d day to the price of
previous day and divided by previous day price.
Stockbit.com users sentiments
The stock bit data is collected for 12 month duration from Jan 2015-dec 2015.
Stockbit sentiment is calculated by supervised learning method. Over 10.000 sample
labeled by three sentiment labels: Negative, Neutral, Positive. Then this labeled set
was used to build a support vector machine which discriminates between three label
for the rest of sentiments.
The resulting data set is in the form of a time series of negative, neutral, and positive
tweets for each day d. Researcher create the following time series for each company:

Volume of post, SPd: Total number of stockbit post in a day

Positive post, SP+d: Number of positive post in a day

Negative post, SP-d: Number of negative post in a day

Neutral post, SP0d: Number of neutral post in a day

Sentiment polarity, Pd: the difference between the number of positive and
negative post as a fraction of non-neutral post
Pd=

SP+dSPd
SP+d + SPd

Correlation and Granger Causality is used to analyze the relation between stockbit
sentiment and stockprices. Researcher measure the linear dependence between Pd
and Rd.

Quantitative Research Method Midterm Exam

12

Faishal Ahmad Farrosi 29015011

4. Research Timeline

Year 1
Activities

Year 2
8

Chapter I
Chapter II
Chapter III
Chapter IV
Chapter V
Conference paper
submission
Thesis/ Dissertation
Writing

5. References/ Bibliography
Armistead, N. (2014). Comparative analysis of individual investor portfolios based on
behavioral finance and efficient market theories (Order No. 3644064). Available from
ProQuest Dissertations & Theses Full Text: The Sciences and Engineering Collection.
(1624878627).
Bodie, Z. (2009). Investments. Tata McGraw-Hill Education.
Chung, W. (2004). An automatic text mining framework for knowledge discovery on the web
(Order

No. 3132206). Available from ABI/INFORM

Complete; ProQuest

Dissertations & Theses Full Text: The Sciences and Engineering Collection.
(305214985).
Fama, Eugene F. (1970). The Behavior of Stock-Market Prices, The journal of Business, Vol.
38, No.1(Jan., 1965), pp. 34-105
Fayyad, U.M., & Uthurusamy, R. (2002). Evolving data mining into solutions for insights.
Communications of the ACM, 45(8), 28-31

Quantitative Research Method Midterm Exam

13

Faishal Ahmad Farrosi 29015011

Fromlet, H. (2001). Behavioral finance-theory and practical application. Business Economics,

36(3),

63-69.

Retrieved

from

http://search.proquest.com/docview/199860913?

accountid=31562
Hearst, M.A. (1999). Untangling text data mining. In: Proceedings of the 37th Annual
Meeting of the Association for Computational Linguistics, College Park, MD: The
Association for Computational Linguistics.
Lin, Tom C. W., A Behavioral Framework for Securities Risk (April 16, 2012). 34 Seattle
University Law Review 325 (2011) . Available at SSRN:
http://ssrn.com/abstract=2040946
Prechter R (2001), "Unconscious Herding Behavior as the Psychological Basis of Financial
Market Trends and Patterns", The Journal of Psychology and Financial Markets, Vol.
2, No. 3, pp. 120-125.
Shiller, R. J. (2005). Irrational exuberance. Princeton, N.J: Princeton University Press.
Turnbull, D. R. (2002). Knowledge discovery in databases of web use: Data mining for
informetric and behavioral models of information seeking on the world wide web
(Order No. NQ74651).
Qawi, R. B. (2010). Behavioral finance: Is investor psyche driving market performance? IUP
Journal of Behavioral Finance, 7(4), 7-19.

Quantitative Research Method Midterm Exam

14