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Google Internet search activity and volatility prediction in the market for foreign currency

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  • Smith, Geoffrey Peter

Abstract

I study whether evolution in the number of Google Internet searches for particular keywords can predict volatility in the market for foreign currency. I find that data on Google searches for the keywords economic crisis+financial crisis and recession has incremental predictive power beyond the GARCH(1,1). These results support the mixture of distributions hypothesis in that volatility is linked to the stochastic rate at which information flows into the marketplace. These results also demonstrate the potential for Google to become a storehouse of information for financial markets.

Suggested Citation

  • Smith, Geoffrey Peter, 2012. "Google Internet search activity and volatility prediction in the market for foreign currency," Finance Research Letters, Elsevier, vol. 9(2), pages 103-110.
    • Handle: RePEc:eee:finlet:v:9:y:2012:i:2:p:103-110
    DOI: 10.1016/j.frl.2012.03.003
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    More about this item

    Keywords

    Google insights for Search; ARCH (GARCH); Mixture of distributions hypothesis (MDH); Foreign currency; Foreign exchange;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

    Statistics

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