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 theJournal of Banking and Finance.
The researchers analysed Google search frequencies for keywords related to 30 of the largest stocks traded on the New York Stock Exchange and Nasdaq, examining the level of demand for information, a concept that has been debated for many years only at a theoretical level.
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 Thomson 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.”