Abstract
This study analyzes the relationship of the volatility ofstock returns and internet search volume (ISV). The dataset consists of 10 Turkish companies listed on the BIST-100 Index of Borsa Istanbul, and encompasses the period between January 2004 - September 2013. The GARCH (1,1) model is applied with two alternative mean specifications. The use of the novel exogenous variable ISV as proxy for investor sentimentis complemented through the inclusion of trading volume.Results show that as the GARCH (1,1) model becomes increasingly nested, volatility persistence declines with however no case of a vanishing G(ARCH) effect.
Highlights
In the 1960s the predominant view in academia was that asset prices in well-functioning markets, with investors holding rational expectations,followed a random walk, and cannot be predicted
Aim and Scope: This study aims to analyze the effects of internet search data on stock return volatility, in isolation and together with trading volume, using increasingly nested GARCH(1,1) models
The implications of the findings of the present study are that (1) there is a relationship between internet search volume and stock return volatility (2) this relationship holds when trading volume is included as an explanatory variable (3) G(ARCH) effects are not eliminated, meaning that neither internet search volume alone, nor together with trading volume as explanatory variables, do not fully explain the observed heteroskedasticity in stock returns (4) volatility persistence decreases, and mean reversion is quicker with the inclusion of the internet search volume along, an deven more so together with the trading volume variable
Summary
In the 1960s the predominant view in academia was that asset prices in well-functioning markets, with investors holding rational expectations,followed a random walk, and cannot be predicted. Built upon this foundation Eugene Fama (1965) put forth the efficient markethypothesis (EMH)stating that it is impossible to beat the market since existing share prices already incorporate and reflect all relevant information.The EMH in its strictest form, states that stock markets are very efficient in swiftly incorporating all information (information on past values, stock fundamentals and private information). It should be impossible for investors to beat the market by analyzing past price movements and stock fundamentals since these are already reflected in the prices. Using a stock market index as a proxy for the market portfolio, as commonly used by previous tests, would lead to biased and misleading results
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