Searching for a High: Can Google Predict the Stock Market?
An analysis of changes in Google query volume for search terms related to finance reveals patterns that could be interpreted as early-warning signs of stock market moves.
Tobias Preis, of England's Warwick Business School, Helen Susannah Moat, of University College London, and H. Eugene Stanley, of Boston University analysed changes in the frequency of 98 terms, such as 'revenue', 'unemployment', credit' and 'nasdaq', in Google searches from 2004 to 2011. (see graph)
Preis, Moat and Stanley found that using these changes in search volume as the basis of a trading strategy investing in the Dow Jones Industrial Average Index could have led to substantial profit.
In their paper entitled Quantifying Trading Behavior in Financial Markets published in Nature Publishing Group’s Scientific Reports, the team of academics demonstrate that trading on the basis of the number of queries on Google using the keyword 'debt' could have brought in returns of up to 326 per cent (see graph).
Dr. Preis, Associate Professor of Behavioural Science at Warwick Business School, said: "We found that changes in the volume of certain Google search terms could be used as early warning signs of subsequent stock market movement."
The research supports the idea that drops in the financial market may be preceded by periods of investor concern. Investors may search for more information about the market before they are prepared to sell at lower prices. Conversely, the researchers found that drops in interest in financial topics could be used as a signal for subsequent stock market rises.
"Analysis of Google Trends data may offer a new perspective on the decision making processes of market participants during periods of large market movements", said Dr. Moat, based at University College London.
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