VADER SENTIMENT ANALYSIS ON TWITTER: PREDICTING PRICE TRENDS AND DAILY RETURNS IN INDIA’S STOCK MARKET

Abstract

The study explores the effectiveness of sentiment analysis in predicting stock price movements, specifically focusing on the Indian Stock Market. The study investigates the reliability of social media sentiment analysis in financial markets and its implications for investors and traders. The research utilizes a sample of Twitter data comprising tweets containing hashtags related to the State Bank of India (SBI), used as a representative sample of the broader Indian Stock Market, collected from January 2021 to February 2024. The Valence Aware Dictionary for Sentiment Reasoning (VADER) algorithm was employed to analyse the sentiment of the Twitter data. Machine learning methods, including Random Forest, XGBoost, and AdaBoost, were used to integrate sentiment scores with technical indicators for predicting stock price trends. The results reveal that using only sentiment analysis achieved an accuracy of around 60% in predicting stock price direction. However, this accuracy increased to 70% with the AdaBoost method, 79% with the XGBoost method, and 82% with the Random Forest method combined with technical indicators while increasing the F1 scores from 0.4 to 0.8 in all three methods. Integrating sentiment analysis with technical indicators enhances financial market predictions by combining real-time investor sentiment with empirical historical data, leading to more accurate and adaptive trading strategies. Sentiment score was found to have a strong positive correlation with positive daily returns compared to negative daily returns, indicating that higher positive sentiment is associated with increased returns. Although negative sentiment exhibits a statistically significant correlation with daily returns, it shows a weaker positive association.