Analysing market reactions based on google search trends

Abstract

Warren Buffett once said, “The most important quality for an investor is temperament, not intellect” (Bacha, 2016). However, apart from the behavioural aspect, information asymmetry is one of the most of the most crucial factors which helps an investor in generating alpha over broad market index. One of the researches done in this area is regarding the usage of Google Search Trends. A study has been conducted to analyse the movement of Dow Jones Industrial Average Index (DJIA) vis-à-vis change in volume of Google search queries. Further, an investment strategy called ‘Google Trends Strategy’ was developed which would generate positive results only when the prediction is correctly made based on the Google Trends (Stanley, 2013). In this report, the Google Trends Strategy have been applied on the Indian bourses. It is concluded that the trends identified could be utilized for predicting future market movements in the indices and that they outperform the traditional Buy and hold strategy. Additionally, the retail shareholding in Small Cap vs Mid & Large Cap index has been factored in, to develop an understanding of scenarios in which the Google Trends Strategy is effective.