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Measuring economic uncertainty and its impact on the stock market

Michal Dzielinski

Finance Research Letters, 2012, vol. 9, issue 3, 167-175

Abstract: This paper proposes a novel measure of economic uncertainty based on the frequency of internet searches. The theoretical motivation is offered by findings in economic psychology that agents respond to increased uncertainty by intensifying their information search. The main advantages of using internet searches are broad reach, timeliness and the fact that they reflect actions, rather than words, which however are not directly related to the stock market. The search-based uncertainty measure compares well against a peer group of alternative indicators and is shown to have a significant relationship with aggregate stock returns and volatility.

Keywords: Economic uncertainty; Google trends; Information search (search for similar items in EconPapers)
JEL-codes: C22 G12 G14 G17 (search for similar items in EconPapers)
Date: 2012
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