Does Google Trends Predict Market Returns? A Second Look…

Does Google Trends Predict Market Returns? A Second Look…

March 18, 2014 Research Insights
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(Last Updated On: January 18, 2017)

Do Google Trend Data Contain More Predictability than Price Returns?

Abstract:

Using non-linear machine learning methods and a proper backtest procedure, we critically examine the claim that Google Trends can predict future price returns. We first review the many potential biases that may influence backtests with this kind of data positively, the choice of keywords being by far the greatest culprit. We then argue that the real question is whether such data contain more predictability than price returns themselves: our backtest yields a performance of about 17bps per week which only weakly depends on the kind of data on which predictors are based, i.e. either past price returns or Google Trends data, or both.

Data Sources:

Google Trends Data

Alpha Highlight:

Quote from the paper:

We therefore conclude that price returns and GT contain about the same amount of predictive information, at least with the methods we have used and challenge to community to do any better.

First, a look at different keywords and their ability to predict SP 500 returns. Clearly, there is some evidence for data-mining in the “Google predicts returns” literature.

SSRN-id2405804What about performance? Looks like good old fashioned past returns predicts just as well as the fancier Google Trends data.

pricegt
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

Google Trends Data Needs Some Work!


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Definitions of common statistics used in our analysis are available here (towards the bottom)




About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.