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Measuring economic uncertainty and its impact on the stock market


Dzielinski, Michal (2012). Measuring economic uncertainty and its impact on the stock market. Finance Research Letters, 9(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.

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.

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107 citations in Scopus®
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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Scopus Subject Areas:Social Sciences & Humanities > Finance
Language:English
Date:2012
Deposited On:16 Jan 2012 14:18
Last Modified:23 Jan 2022 20:18
Publisher:Elsevier
ISSN:1544-6131
OA Status:Green
Publisher DOI:https://doi.org/10.1016/j.frl.2011.10.003
Other Identification Number:merlin-id:4533