Do We Price Happiness? Evidence from Korean Stock Market

TL;DR

This paper investigates how Google Trends data on 'happiness' can predict stock returns in Korea, revealing its potential as a risk indicator especially for large and value firms, with implications for investment strategies.

Contribution

It introduces the novel use of 'happiness' search volume as a risk-based predictor for stock returns, expanding the application of internet search data beyond sentiment analysis.

Findings

Happiness search exposure (HSE) explains future stock returns.

HSE is particularly relevant for big and value firms.

Some Google Trends topics relate to stock price risks.

Abstract

This study explores the potential of internet search volume data, specifically Google Trends, as an indicator for cross-sectional stock returns. Unlike previous studies, our research specifically investigates the search volume of the topic 'happiness' and its impact on stock returns in the aspect of risk pricing rather than as sentiment measurement. Empirical results indicate that this 'happiness' search exposure (HSE) can explain future returns, particularly for big and value firms. This suggests that HSE might be a reflection of a firm's ability to produce goods or services that meet societal utility needs. Our findings have significant implications for institutional investors seeking to leverage HSE-based strategies for outperformance. Additionally, our research suggests that, when selected judiciously, some search topics on Google Trends can be related to risks that impact stock prices.