Google search and stock returns: A study on BIST 100 stocks

With the propagation of internet and increase in its usage, people started to use internet for everything in their lives. This leads to creation of huge amount of data and gives huge opportunitiy to researchers to gain insights into behavior of people. Being one of the most visited and used websites, Google is naturally one of the most appealing sources of data. Fortunately, Google Trends shares Google search volume regularly. Google Trends has been exploited by researchers in the recent years and one of the areas that researchers benefit from Google search volume is investor attention. Some scholars employed Google Trends to study the relationship between Google search volume and stock returns. There are already some proxies such as extreme returns, trading volume, and news. Though, they each have a number of flaws in representing the investor attention. Google search volume, on the other hand, is found effective in representing investor attention by some researchers. A few scholars determined that there is a temporary increase in stock returns following an increase in investor attention, which is referred to as price pressure caused by uninformed individual investors in the literature. Existence of this relationship would also challenge the Efficient Market Hypothesis which implies that stocks should reflect all available information and it is not possible to beat the market. If this relationship is proved, then it would be possible to beat the market by investing in most searched stocks. This thesis examines existence of the relationship between Google search and stock returns in Turkish stock market. To capture this relationship, first, separate OLS regressions for BIST 100 stocks are performed and examined whether search volume has explanatory power in stock returns. It is studied whether search volume is associated with return increases or decreases. In the second part of the analysis, stocks are sorted into four portfolios based on their search volumes. If there really is a relationship between Google search and stock returns, then portfolio of the most searched stocks should generate the most abnormal returns. In both of the analyses Fama French three factor model is used. In addition to the literature, direction of the relationship is also examined. Because, it could be the ncrease investor attention that precedes increase in returns or high stock returns may be attracting the attention of investors and cause the internet search volume to increase. The results show that there is a linkage between Google search volume and stock returns but direction of this relationship is somewhat vague. There is a positive and significant relationship for searches made at time t. However, this does not guarantee that the direction is from internet search to stock returns, because it is not clear on which day of the week search interest and returns start to increase. It is also possible that people start to buy the stocks after being aware of the extreme returns. On the other hand, the relationship is also positive and significant for searches made at time t+1, which implies that the direction may be from stock returns to internet search. After realizing that a particular stock's return has increased drastically recently, investors search for these stocks on Google which causes the high search volume and the relationship. This result actually shows the efficiency of Turkish market. Further research with daily data can enhance results of this study by revealing the direction of the relationship. This can make an explanation to the significant result at time t.