Investors are continually looking for anything that will help them deliver profits in a world of low yields and poor interest rates and the answer might be…Google.
Three academics have carried out a study and they say that Google may be able to predict the stock market’s ups and downs.
The trio say that by analysing changes in the search engine’s query volume for a number of terms related to finance could help to reveal early-warning signs of significant stock market moves.
Tobias Preis, Helen Moat and Eugene Stanley looked at 98 words including ‘credit’, ‘Nasdaq’, ‘unemployment’, and ‘revenue’ used in Google searches between 2004 and 2011.
They say that by monitoring variations in search volumes as part of a trading strategy could have led to substantial profits if the investor was putting money into the Dow Jones Industrial Average Index.
They have now published a paper, entitled ‘Quantifying Trading Behaviour in Financial Markets’, which illustrates how each individual word would have impacted on an investment trading strategy.
For instance, an investor using the keyword ‘debt’ would have brought in returns of up to 326%.
Not using the data and simply holding the Dow over the same period would have led to a 16% cumulative return.
Essentially, their research supports the belief that falls in the financial markets are preceded by bouts of investor concern.
They say that investors search for more information about the market performance before they are prepared to sell at lower prices.
The research also reveals that, conversely, any drops in interest for a financial topic could be used as a signal for stock market rises.
Predicting market trends
Dr Moat, based at University College London, said that by analysing Google Trends data may help bring a new perspective to the decision-making process for those investors and dealers watching for large market movements.
She added: “Previously it has for been very difficult to measure the process by which humans gather information before making decisions and it is exciting for us to see how data from online searches may give a new insight into this.”
Their research highlights the huge amounts of data that are being processed every day and which can be utilised to create new possibilities in research.
Their work is part of the IARPA Open Source Indicators programme to develop new ways of analysing data in the public domain to help anticipate significant events for society.
Another aspect of the research is that investors appear to be carrying out more due diligence than they are being given credit for, particularly before selling stocks than buying them.
Go to Google Trends here http://www.google.co.uk/trends/