How Google search trends could predict the next stock market crash

ERYK BAGSHAW
Last updated 14:04 04/08/2014
Reuters

There are precedents for the real-world effects of Google searches.

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The next financial crisis could be preceded by a spike in people searching for politics or business topics on Google, a new study has revealed.

The study by Warwick Business School suggests that an increase in search volume for these topics tends to precede stock market falls.

"By mining these datasets, we were able to identify a historic link between rises in searches for terms for both business and politics and a subsequent fall in stock market prices," said Professor Suzy Moat from the school, which is part of Warwick University in the British Midlands city of Coventry.

It’s the latest development in Google’s evolution from search engine to crystal ball, which now predicts everything from the success of an album or film - to the rate of flu infections in the coming winter.

In a stock market, the instances of Google search terms could provide invaluable predictive insight.  

Stock markets are hives of complex data, often providing detailed information on financial decisions globally.

However, stock market data only records the final decision on whether an investor has bought or sold a share.

The search data acquired from Google Trends provides an insight into the the earlier stages of the process - where people are thinking about buying or selling, the paper argues.  

“This is when traders may gather information to determine what the consequences of various actions may be.”

The research found that searches linked to business or politics correlated to an increased concern about the state of the economy.

“This may lead to decreased confidence in the value of stocks, resulting in transactions at lower prices.”

BOX OFFICE SUCCESS

There are precedents for the real-world effects of Google searches.

The popularity of a film or album has been preceded by a spike in Google searches before its release.

In 2013, Google claimed that it could predict with 94 per cent accuracy, whether a film would be a box office success before it hit a single movie screen.

The number of searches for movie trailers in the four weeks before a film premieres can be used to determine opening weekend revenue, said Google Media and Entertainment representative, Andrea Chen.

FLU TRACKING

Google has also turned its hand to health predictions.

Google flu trends aims to correlate instances of searching for flu symptoms with a rise in flu infections.

Once hailed as the poster boy of big data - it’s come under attack recently from researchers at Harvard and North Eastern University for wildly overestimating the rate of flu infection in the United States.

They called it the “big hubris of big data”.

“The big hubris assumes that big data is a substitute for, rather than a supplement to, traditional data collection and analysis,” David Lazer, a professor at Northeastern University wrote in Science Magazine.

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The co-inventor of Google Flu Trends, Matt Hobebbi agreed with the researchers criticism.

It was always intended as a complementary signal, rather than a standalone forecasting tool, he told the New York Times.

- Sydney Morning Herald

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