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Information demand and stock return predictability

Dimitris K. Chronopoulos, Fotios I. Papadimitriou and Nikolaos Vlastakis ()

Journal of International Money and Finance, 2018, vol. 80, issue C, 59-74

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.

Keywords: Return sign predictability; Information demand; Investor attention; Volatility forecast; Economic value (search for similar items in EconPapers)
JEL-codes: G11 G14 G17 (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:80:y:2018:i:c:p:59-74

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