Explaining stock markets' performance during the COVID‐19 crisis: Could Google searches be a significant behavioral indicator?

Abstract

Summary The purpose of this study is to examine the impact of the pandemic on the performance of stock markets, focusing on the behavioral influence of the fear due to COVID‐19. Using a data set of 10 developed countries during the period December 31, 2019, to September 30, 2020, we examine the impact of COVID‐19 on the performance of the stock markets. We incorporate the impact of the COVID‐19 pandemic using the following variables: (a) the number of new COVID‐19 cases, which was widely used as the main explanatory variable for market performance in early financial studies, and (b) a Google Search index, which collects the number of Google searches related to COVID‐19 and incorporates the health risk and the fear of COVID‐19 (the higher the number of searches for Covid terms, the higher the index value, and the higher the fear index). We employ our input into an EGARCH(1,1,1) model, and the findings show that the Google Search index enables us to draw statistically significant information regarding the impact of the COVID‐19 fear on the performance of the stock markets. On the other hand, the variable of the number of new COVID‐19 cases does not have any statistically significant influence on the performance of the stock markets. Google searches could be a useful tool for supporters of behavioral finance, scholars, and practitioners.

The Impact of Covid-19 on the US Stock Market: Evidence from Time Series Model

“…This result which shows an initial negative and volatile response to COVID-19 and then a sluggish influence is aligned with a previous study done by Vasileiou, who explained the phenomenon in two ways [13]. The most common explanation is that the initial decline in the stock market can be the result of sudden and unexpected negative economic consequences caused by the pandemic.…”

“…When stimulus packages, vaccines, and revaluated restrictions were employed in later months, the market slowly recovered from the initial shock. Another explanation proposed by Vasileiou is that behavioral factors such as risk aversion and fear can also cause market fluctuation [13]. Decker and Schmitz proved that "health risk is positively associated with risk aversion" [14].…”

America's decoupling from China: A perspective from stock markets

“…A few others interpreted Google Trends as a combination of fundamental and behavioural factors. For example, Vasileiou (2021) argued that Google Trends seeks to bridge the gap between behaviouralists and efficient market hypothesis supporters. (according to Preis et al (2013), Google Trends data reflects aspects of the current state of the economy as well as giving some insight into future trends in the behaviour of economic actors.…”

Using Google Trends to track the global interest in International Financial Reporting Standards: Evidence from big data

“…They used abnormal Google searches to gauge investor demand for information and discovered that Google searches increase 2 weeks prior to an earnings announcement, peak during the announcement and remain elevated for a period following the announcement. Further, Vasileiou (2021) analyzed Google Trends data to understand the effects of the COVID-19 pandemic on stock market indexes of 10 developed countries. He found that the increased volume of Google searches for terms related to COVID-19 indicates periods of increased fear, leading to an increase in risk aversion and a decline in stock prices.…”