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Information demand and stock return predictability

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  • Chronopoulos, Dimitris K.
  • Papadimitriou, Fotios I.
  • Vlastakis, Nikolaos

Abstract

Recent theoretical work suggests that signs of asset returns are predictable given that their volatilities are. This paper investigates this conjecture using information demand, approximated by the daily internet search volume index (SVI) from Google. Our results reveal that incorporating the SVI variable in various GARCH family models significantly improves volatility forecasts. Moreover, we demonstrate that the sign of stock returns is predictable contrary to the levels, where predictability has proven elusive in the US context. Finally, we provide novel evidence on the economic value of sign predictability and show that investors can form profitable investment strategies using the SVI.

Suggested Citation

  • Chronopoulos, Dimitris K. & Papadimitriou, Fotios I. & Vlastakis, Nikolaos, 2018. "Information demand and stock return predictability," Journal of International Money and Finance, Elsevier, vol. 80(C), pages 59-74.
    • Handle: RePEc:eee:jimfin:v:80:y:2018:i:c:p:59-74
    DOI: 10.1016/j.jimonfin.2017.10.001
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    More about this item

    Keywords

    Return sign predictability; Information demand; Investor attention; Volatility forecast; Economic value;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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