Finding the Risk-Return Trade-Off With Google

Abstract

Investor attention is central to explaining the mean-variance puzzle. Using Google Search Volumes as a proxy to attention, I document a positive trade-off during low attention periods that is significantly undermined when attention is high. The negative association between on-line searches and the trade-off is also present in the time-varying analysis. I also find that this deterioration can be explained by the escalation of risk brought about by the entry of retail investors into the market. The results are robust for several alternative explanations, such as data periodicity, conditional variance measures, on-line search terminologies and macroeconomic variables, and provide further support for the importance of noise-traders to stock market inefficiency.

Keywords: Risk-Return Trade-Off, Investor Attention, Google Trends, Noise Trader Approach

JEL Classification: G10, G12, G14