Effect of Online Searches on Stock Returns

Abstract

Various theoretical models assume that information seeking behavior of investors has an impact on prices. However, it is very difficult to empirically test this, since the actual information acquisition process of the investors is unobservable. Using a unique data set from Google Trends, I construct a search volume index (SVI) and use it to proxy for the information seeking behavior of retail investors. Using a portfolio based approach I document the asymmetric response of future returns to the changes in the google search volume. I find that the portfolio with the highest increase in the SVI has positive and significant alphas while portfolios with decrease in SVI show no significant results.  My results are robust to alternative specifications of risk models, time frames and measures of search index. Overall, my results are in line with the hypothesis that retail investors’ trades can effect stock prices.