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Information demand and stock return predictability

Information demand and stock return predictability
Information demand and stock return predictability

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.

Economic value, Information demand, Investor attention, Return sign predictability, Volatility forecast
0261-5606
59-74
Chronopoulos, Dimitris K.
5537b805-450f-4ef4-b3e3-116e5b50db3e
Papadimitriou, Fotios I.
e90e7f7a-0d8d-4fbb-9b08-729d2dd2e217
Vlastakis, Nikolaos
95a8c089-6b4c-4d6c-a8fa-5bacd04b6c97
Chronopoulos, Dimitris K.
5537b805-450f-4ef4-b3e3-116e5b50db3e
Papadimitriou, Fotios I.
e90e7f7a-0d8d-4fbb-9b08-729d2dd2e217
Vlastakis, Nikolaos
95a8c089-6b4c-4d6c-a8fa-5bacd04b6c97

Chronopoulos, Dimitris K., Papadimitriou, Fotios I. and Vlastakis, Nikolaos (2018) Information demand and stock return predictability. Journal of International Money and Finance, 80, 59-74. (doi:10.1016/j.jimonfin.2017.10.001).

Record type: Article

Abstract

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.

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More information

e-pub ahead of print date: 6 October 2017
Published date: 1 February 2018
Keywords: Economic value, Information demand, Investor attention, Return sign predictability, Volatility forecast

Identifiers

Local EPrints ID: 434983
URI: http://eprints.soton.ac.uk/id/eprint/434983
ISSN: 0261-5606
PURE UUID: 34e6cf0d-b877-4c22-9f3e-396fab4a8c96

Catalogue record

Date deposited: 17 Oct 2019 16:30
Last modified: 16 Mar 2024 04:36

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Contributors

Author: Dimitris K. Chronopoulos
Author: Fotios I. Papadimitriou
Author: Nikolaos Vlastakis

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