Information demand and stock return predictability
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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.
Chronopoulos , D K , Papadimitriou , F I & Vlastakis , N 2018 , ' Information demand and stock return predictability ' , Journal of International Money and Finance , vol. 80 , pp. 59-74 . https://doi.org/10.1016/j.jimonfin.2017.10.001
Journal of International Money and Finance
© 2017 Elsevier Ltd. This work has been made available online in accordance with the publisher’s policies. This is the author created, accepted version manuscript following peer review and may differ slightly from the final published version. The final published version of this work is available at https://doi.org/10.1016/j.jimonfin.2017.10.001
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