Online reviews can predict long-term returns of individual stocks

TL;DR

This study demonstrates that online consumer reviews can be effectively used to predict the long-term stock returns of individual companies, offering a new tool for investors.

Contribution

It introduces a novel methodology framework that leverages extensive online review data to predict long-term stock returns at the individual stock level.

Findings

Achieved 13.94% accuracy improvement over existing models.

Selected 6,246 features from 13 categories based on 18 million reviews.

Confirmed the predictive power of online reviews for long-term stock performance.

Abstract

Online reviews are feedback voluntarily posted by consumers about their consumption experiences. This feedback indicates customer attitudes such as affection, awareness and faith towards a brand or a firm and demonstrates inherent connections with a company's future sales, cash flow and stock pricing. However, the predicting power of online reviews for long-term returns on stocks, especially at the individual level, has received little research attention, making a comprehensive exploration necessary to resolve existing debates. In this paper, which is based exclusively on online reviews, a methodology framework for predicting long-term returns of individual stocks with competent performance is established. Specifically, 6,246 features of 13 categories inferred from more than 18 million product reviews are selected to build the prediction models. With the best classifier selected from cross-validation tests, a satisfactory increase in accuracy, 13.94%, was achieved compared to the cutting-edge solution with 10 technical indicators being features, representing an 18.28% improvement relative to the random value. The robustness of our model is further evaluated and testified in realistic scenarios. It is thus confirmed for the first time that long-term returns of individual stocks can be predicted by online reviews. This study provides new opportunities for investors with respect to long-term investments in individual stocks.