How Does Google Search Affect the Stock Market? Evidence from Indian Companies

Google search data has received considerable attention for its predictive ability in various social and economic outcomes. In the arena of investments, a surge in online searches indicates an enhanced interest of investors, particularly retail, in that company. In this article, we have examined the association between Google search and stock prices in a sample of Indian companies. The results suggest that an increase in Google search is positively related to future excess stock returns, liquidity and volatility. The positive influence of Google search on stock prices, however, is temporary and reverses in the next week. We further show that the market sentiment moderates the interconnection between Google searches and future excess stock returns. The findings are in consonance with the ‘price pressure hypothesis’ of Barber and Odean (2008, Review of Financial Studies, 21(2), 785–818).

Sovereign Credit Quality and Violations of the Law of One Price

It is well-documented that government bonds with almost identical cash flows can trade at different prices. This paper analyzes the cross-section of bond spreads across developed European countries and documents a novel result. While a measure of the convenience yield of government bonds helps explain these spreads, it cannot explain the behavior of bond spreads in periods of widening credit risk. The paper documents bond spreads between new and old issues tighten for low quality sovereigns. In other words, the newer more liquid bonds become cheaper, not more expensive, relative to their older counterparts. We offer an explanation based on price pressure and provide empirical support using data on net flows of investors in sovereign bonds.

Why Do Option Prices Predict Stock Returns? The Role of Price Pressure in the Stock Market

Stock and options markets can disagree about a stock’s value because of informed trading in options and/or price pressure in the stock. The predictability of stock returns based on this cross-market discrepancy in values is especially strong when accompanied by stock price pressure, and it does not depend on trading in options. We argue that option-implied prices provide an anchor for fundamental stock values that helps to distinguish stock price movements resulting from pressure versus news. Overall, our results are consistent with stock price pressure being the primary driver of the option price-based stock return predictability. This paper was accepted by Tyler Shumway, finance.

Overconfident Institutions and Their Self-Attribution Bias: Evidence from Earnings Announcements

Institutional demand for a stock before its earnings announcement is negatively related to subsequent returns. The relation is not attributable to the price pressure of institutional demand and is stronger for stocks with higher information asymmetry and/or greater valuation difficulty. These findings support the notion that overconfident institutions misprice stocks. Following announcements, institutions’ behavior exhibits the outcome-dependent feature of self-attribution bias. Whether they become more overconfident and delay their mispricing correction depends on whether earnings news confirms their preannouncement trades. This behavioral bias also offers a new explanation for the well-known post-earnings-announcement drift.

The Impact of Foreigners’ Trades on Equity Prices: Evidence from Macedonian Stock Exchange

Emerging countries’ economies are dependent on foreign capital inflows. For policy makers and researchers of particular interest is to understand the nature of these flows and their impact on the domestic capital market. The first significant foreign inflows entered the Macedonian Stock Market at the end of 2004, and stock prices were increased. It was general belief among the investors that foreigners are driving the prices on the Macedonian Stock Market. This study examines the influence of foreign investors’ trades on stock returns in Macedonia using base broadening and price pressure hypotheses. Strong evidence consistent with the base-broadening hypothesis shows that 1% of monthly net inflows as a percentage of last month market capitalization is connected with 7% rise in monthly returns on the Macedonian stock market. The findings do not support the price pressure hypothesis, so the rise in the prices is permanent.