Abstract:
Keyword-based measures purporting to reflect investor sentiment, attention or uncertainty have increasingly been used to model stock market behaviour. We investigate and shed light on the narrative reflected by Google search trends (GST) by constructing a neutral and general stock market-related GST index. To do so, we apply elastic net regression to select investor relevant search terms using a sample of 77 international stock markets. The index peaks around significant events that impacted global financial markets, moves closely with established measures of market uncertainty and it is predominantly correlated with uncertainty measures in differences, implying that GST reflect an uncertainty narrative. Returns and volatility for developed, emerging and frontier markets widely reflect changing Google search volumes and relationships conform to a priori expectations associated with uncertainty. Our index performs well relative to existing keyword-based uncertainty measures in its ability to approximate and predict systematic stock market drivers and factor dispersion underlying return volatility both in-sample and out-of-sample. Our study contributes to the understanding of the information reflected by GST, their relationship with stock markets and points towards generalisability, thus facilitating the development of further applications using internet search data.
