Investors should consider the frequency of Google searches for particular keywords when analysing movements in the stock market. This is one of the key practical recommendations of a new report from researchers at Essex Business School at the University of Essex and Norwich Business School at the University of East Anglia which has been published in the Journal of Banking and Finance.
The researchers analysed a unique dataset of Google search frequencies for keywords related to 30 of the largest stocks traded on the New York Stock Exchange and NASDAQ. They were able for the first time to examine the level of demand for information, a concept that has been debated for many years only at a theoretical level.
The results are in line with the fact that over the past few years investors are increasingly using the internet in pursuit of the most valuable asset: information. However, this study confirms that the internet has indeed revolutionised not only the the production, intermediation and dissemination of information but also its consumption for investment purposes.
The study revealed that the demand for information on the internet has a direct effect on all measures of stock market activity. Importantly, the effect remains significant, even if the supply of information – as measured by the number of news items reported by Reuters – is taken into consideration.
Dr Nikolaos Vlastakis from Essex Business School says: “We derived two new measures for information demand – one for the individual company and one for the whole market – and discovered that both have a strong association with stock return volatility and trading volume.
“Interestingly, we also found that the link between information demand and market activity becomes more prominent during turbulent times, such as the recent financial crisis.”
Professor Raphael Markellos of the University of East Anglia, says: “We explain this latter effect by showing that information demand is linked to investor attitudes towards risk. In periods such as the recent financial crisis, investors try harder than usual to reduce uncertainty by searching for information via Google”.
The study also suggests that in the information age, large news agencies are not the exclusive providers of new information: “Our results suggest that information formation and discovery may be shared between mainstream information brokers and alternative sources on the web – such as blogs, local information providers, social media, etc. For certain types of news, the big suppliers still have the edge due to expertise and resources, but there are cases when news is first reported ‘unofficially’ elsewhere,” says Dr Vlastakis.
