The Effect of Quantitative Easing through Google Metrics on US Stock Indices

Nikoletta Poutachidou,Stephanos Papadamou

doi:10.3390/ijfs9040056

Nikoletta Poutachidou, Stephanos Papadamou

Open Access

https://doi.org/10.3390/ijfs9040056

Copy DOI

Abstract

The purpose of this study is to investigate the fluctuations that occur in stock returns of US stock indices when there is an increase in the volume of Google internet searches for the phrase “quantitative easing” in the US. The exponential generalized autoregressive conditional heteroscedasticity model (EGARCH) was applied based on weekly data of stock indices using the three-factor model of Fama and French for the period of 1 January 2006 to 30 October 2020. The existence of a statistically significant relationship between searches and financial variables, especially in the stock market, is evident. The result is strong in three of the four stock indices studied. Specifically, the SVI index was statistically significant, with a positive trend for the S&P 500 and Dow Jones indices and a negative trend for the VIX index. Investor focus on quantitative easing (QE), as determined by Google metrics, seems to calm stock market volatility and increase stock returns. Although there is a large body of research using Google Trends as a crowdsourcing method of forecasting stock returns, this paper is the first to examine the relationship between the increase in internet searches of “quantitative easing” and stock market returns.

Highlights

Central banks pursue monetary policy by changing the money supply, credit, and interest rates for economic prosperity
The purpose of this study is to investigate the fluctuations that occur in stock returns of US stock indices when there is an increase in the volume of Google internet searches for the phrase “quantitative easing” in the US
Before looking at the results, we must point out that the exponential generalized autoregressive conditional heteroscedasticity model (EGARCH) models were evaluated with different classes of parameters p and q, where the selection of the most suitable model for each model was conducted by evaluating the Akaike, Schwarz, and Hannan–Quinn criteria

Summary

Introduction

Central banks pursue monetary policy by changing the money supply, credit, and interest rates for economic prosperity. They use daily monetary policy transmission tools, which are categorized as either conventional or nonconventional. The central bank is not involved in direct lending to the private sector or government, or in indirect purchases of government bonds, corporate debt, or other types of debt instruments. The need to apply nonconventional monetary instruments to ease the economic downturn became apparent. Distinguished among nonconventional monetary policy measures is the large-scale asset purchasing policy (LSAP), or quantitative easing (QE), as applied by the Federal Reserve and the BoE since late 2008 and early 2009

Objectives

Methods

Results

Conclusion