Online searches ‘crystal ball’ early financial stress: RBA

The Reserve Bank of Australia (RBA) has constructed “timely, high-frequency indicators of financial stress” among households and businesses using information gleaned from Google Trends, news data, and Twitter, the central bank has announced.

Prudently analysing markets and trends to anticipate financial stress isn’t entirely new, but the RBA using such “non-traditional data sources” to detect home and business defaults and arrears is, or so it thinks it is, as outlined on Thursday (8 December).

“To our knowledge, this is the first time globally these non-traditional data sources have been used to construct indicators of financial stress,” RBA economic research department authors, Finn Lattimore and Max Zang, have explained.

In an RBA bulletin document titled New Measures of Financial Stress from Non-traditional Data, Mr Lattimore and Mr Zang officially confirmed the central bank is essentially looking at such online and social media data to ‘see’ financial stress first before things get worse.

Measuring stress with Google Trends keyword searches, news, and Twitter tweets — somewhat cross-referencing the data as per the three precogs’ perceptions in the 2002 sci-fi thriller Minority Report — all three sources are “likely to provide a mixture of backward- and forward-looking views of stress,” the authors described.

“Tweets and news stories discuss both events in the past and concerns for the future,” they said.

“Google searches may be driven by interest in past events, or by individual concerns around current and future financial stress.

“Our analysis of non-traditional data for monitoring financial stress is inductive. That is, we start with the data first and then explore its usefulness in providing indicators for financial stress.

“Three non-traditional data sources were selected to provide complimentary (sic) insights into financial stress.”

Source choice and why so

The RBA authors, with insights from peers Cathie Close, Callan Windsor and John Simon, outlined the reasoning behind the source selection.

News data — from Dow Jones Factiva Archive — aggregated information from a wide range of sources, from “expert views and opinions to personal stories of financial difficulty”.

“The news reflects what news agencies believe is of interest to readers, which is likely to capture both the general level of concern about financial conditions in the population, as well as what is politically topical and key events happening overseas,” they stated.

Social media data — via Twitter — provided “a more direct view of what individuals, including small business owners, are concerned about, and also feeds off political and media discussion,” they said, citing that it was “common to see users publicly tweet about examples of financial difficulties they or their friends are struggling with, as it relates to broader issues being covered in the news media”.

The first outlet for search data — Google Trends — provided “some insight into the private concerns of individuals, as captured by the searches they make for financial information and assistance,” they concluded.

What the bank is looking for

The RBA confirmed its Financial Stress Index is based on the volume of Google searches for a set of keywords, phrases, and topics that people may search for when their household or business is experiencing financial stress.

“For example, the index includes searches such as ‘defer my utility bill’ as well as searches for ‘cash assistance’ and ‘loan support’,” they said.

The index also incorporates topics identified by Google as relevant to financial stress keywords, it stated.

Interestingly, for households, the index is mostly driven by concepts related to ‘debt’, followed by ‘personal loans’ and ‘bankruptcy’. For businesses, the main components are related to ‘cash-flow’, ‘liquidation’, and ‘business support’, the RBA authors highlighted.

“Movements in the business index are driven almost entirely by the experiences of small and medium-sized businesses (SMEs), given they comprise almost all businesses in Australia and so dominate search activity,” they said.

“Furthermore, larger listed businesses are unlikely to turn to Google when experiencing financial problems as they have other resources to draw on.

“The index’s focus on SMEs is one of its key features as timely, high-frequency data on financial stress for smaller businesses is otherwise not readily available.”

Twitter’s timeliness is on point

Now owned by business magnate Elon Musk, microblogging site Twitter’s data allows the RBA to “construct measures of financial stress” by tracking the proportion of all tweets from Australian users that contain keywords suggesting financial difficulties.

“The queries are constructed to capture both the relevant topic and negative sentiments,” Mr Lattimore and Mr Zang said.

“We do so by counting all tweets that contain pair-wise combinations of words related to household or business debt with associated negative connotations.

“For example, the tweet ‘feeling overwhelmed by my mortgage’ would be counted in our indicator.

“The stress indicator is then a time series of these tweets as a share of the total number of tweets, which can be aggregated to a desired frequency. Tweet counts matching a given query can be obtained in real-time via Twitter’s Application Programming Interface (API), allowing us to construct daily indicators with no lag.”

The pair explained that sufficient volumes of tweets to produce indices are available from 2016 onwards.

Impact on society

Including “non-traditional data sources” is aimed to address “this information gap”, given household and business financial stress has significant implications for financial stability and monetary policy, the RBA explained.

“However, high-frequency and timely indicators of emerging signs of financial stress are not [to date] readily available,” it added.

[Related: Borrowers facing ‘unchartered waters’, warns CoreLogic]