Can Google Predict The Stock Market?

A new study claims to have discovered patterns in Google search terms relating to finance, which could be used to reveal early-warning signs of stock market moves (it sounds like a 'get rich quick' scheme, doesn't it?). Armed with nothing but Google Trends, canny investors and traders have the potential to anticipate whether the stock market will rise or fall before it happens.

Stock market picture from Shutterstock

Researchers from the Universities of Warwick and Boston conducted a quantitative analysis of Google searches from 2004 to 2011 to investigate the information-gathering process that precedes the trading decisions recorded in stock market data. The team analysed 98 specific search terms relating to finance, debt and stock markets.

They found that the data capturing changes in Google search behaviour were accurate enough to anticipate financial trends before they happened:

Our results are consistent with the suggestion that during the period we investigate, Google Trends data did not only reflect aspects of the current state of the economy, but may have also provided some insight into future trends in the behavior of economic actors.

The below figure depicts profit and loss for an investment strategy based on the volume of the search term 'debt'. The Google Trends strategy (depicted in blue) using the search volume of the term debt, would have yielded a profit of 326%.

The report concludes that trends to sell on the financial market at lower prices may be preceded by periods of concern, during which people tend to gather more information about the state of the market. By following these trends, future dips in the stock market can be anticipated.

However, the report acknowledges that patterns within Google Trends become less clear when using global search volume data. According to the researchers, this is because the population of US Internet users contains a higher proportion of traders on the US markets.

Quantifying Trading Behavior in Financial Markets Using Google Trends [Scientific Reports]


Comments

    There was this quote from Eric Schmidt years back
    “One day we had a conversation where we figured we could just try to predict the stock market. And then we decided it was illegal. So we stopped doing that.”

    Ignoring the illegal part technically if someone did figure out a 'fool-proof' way of predicting the patterns of the stock market one of two things would happen. The stock market would self correct and the patterns would change rendering that method of prediction unreliable OR the market would collapse....

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