Insights from the Geopolitical Sentiment Index made with Google Trends

Abstract

This paper examines the relationship between geopolitical sentiment and equity markets using the Geopolitical Sentiment Index (GSI), constructed from Google Trends data. Initially, we explored the impact of geopolitical stress on defence-focused ETFs but found no significant effect. Shifting focus, we investigated how geopolitical risk influences the performance differential between small-cap (IWM) and large-cap (SPY) stocks. A reversal trading strategy based on monthly GSI changes was employed, with the 12-month GSI percentage change proving most effective, achieving a Sharpe ratio of 0.38. The GSI shows potential for guiding investment decisions in volatile geopolitical environments.

JEL Classification: G11, G12, G14