Attention bubbles

Author: Chris Dillow

Stock-pickers have no shortage of buy signals, be they fundamental indicators of earnings and cash flow, or technical trading signals. There is, though, another type of indicator to consider - the frequency with which shares are searched for in Google. New research by Zhi Da and Pengjie Gao of the University of Notre Dame and Joseph Engelberg at the University of North Carolina has found that this can predict returns.

They measured abnormal search volume - the number of searches for a share's ticker symbol in one week, relative to the number in the previous eight weeks. They found that lots of searches led to share prices rising. A one standard deviation rise in search volume led to shares outperforming by an average of 0.3 percentage points in the following two weeks.

The reason for this is simple. A lot of searches for a stock is a sign that investors are paying attention to it - which is often a precursor to them buying it. This is consistent with other evidence that Google search data has predictive power. Hal Varian, Google's chief economist, has found that search volume is correlated with sales of cars and houses. And Google researcher Jeremy Ginsberg shows that searches can be a more timely indicator of 'flu epidemics than official data.

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