Can We Predict the Financial Markets Based on Google's Search Queries?

We look into the interaction of Google's search queries and several aspects of international equity markets. Using a novel methodology for selecting words and a vector autoregressive modeling approach, we study whether the search queries of finance‐related words can have an impact on returns, v...

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Bibliographic Details
Published inJournal of forecasting Vol. 36; no. 4; pp. 454 - 467
Main Authors Perlin, Marcelo S., Caldeira, João F., Santos, André A. P., Pontuschka, Martin
Format Journal Article
LanguageEnglish
Published Chichester, UK John Wiley & Sons, Ltd 01.07.2017
Subjects
google trends
investor attention
market efficiency
market microstructure
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Summary:We look into the interaction of Google's search queries and several aspects of international equity markets. Using a novel methodology for selecting words and a vector autoregressive modeling approach, we study whether the search queries of finance‐related words can have an impact on returns, volatility of returns and traded volume in four different English‐speaking countries. We identify several words whose search frequency is associated with changes in the dependent variables. In particular, we find that increases in search queries including the word stock predict increased volatility and decreased index returns over the next week. On top of that, we investigate the performance of a market‐timing strategy based on the search frequency of this word and benchmark it against random words from the Word‐Net database and a naive buy‐and‐hold strategy. The results of this empirical application are positive and particularly stronger during the global crisis of 2009. Copyright © 2016 John Wiley & Sons, Ltd.
ISSN:0277-6693
1099-131X
DOI:10.1002/for.2446