Journal of Banking & Finance 41 (2014) 17–35

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Journal of Banking & Finance

journal homepage: www.elsevier.com/locate/jbf

Investor attention, index performance, and return predictability q

Nadia Vozlyublennaia ⇑
Area of Finance, Rawls College of Business Administration, Texas Tech University, Lubbock, TX 79409-2101, United States

a r t i c l e i n f o a b s t r a c t

Article history: We investigate a link between the performance of several security indexes in broad investment catego-
Received 19 July 2013 ries and investor attention as measured by Google search probability. We find that there is a significant
Accepted 14 December 2013 short-term change in index returns following an increase in attention. Conversely, a shock to returns
Available online 27 December 2013
leads to a long-term change in attention. Given this evidence, we hypothesize that a change in index
return or the sign of its return in the past can indicate the nature of the information that investors are
JEL classification: paying attention to. Therefore, past returns should determine the impact of attention on the future
G10
returns and volatility. Indeed, we find significant interaction effects between lagged returns and atten-
G14
G17
tion. This result suggests that attention can alter predictability of index returns. Specifically, we demon-
strate that increased investor attention diminishes return predictability and, therefore, improves market
Keywords: efficiency.
Investor attention Ó 2013 Elsevier B.V. All rights reserved.
Google search probability
Security index
Asset returns
VAR

1. Introduction We measure the retail investor attention – Google search

Efficient market hypothesis (see Fama, 1970) implies that all
relevant information should be instantaneously incorporated into
security prices. Despite appealing theoretical justification of the
hypothesis, substantial evidence has been accumulated suggesting
that the markets may not be efficient. In particular, observed
predictability of security returns, return autocorrelations, return
reversals, and momentum1 are often interpreted as a violation of
market efficiency. Theoretical models that are aimed at explaining
the presence of these anomalies in asset returns (see, for instance,
Barberis et al., 1998; Daniel et al., 1998; Hong and Stein, 1999)
typically investigate some form of investors’ reaction to new
information. Therefore, investors’ attention must play a role in asset
prices, returns, and the efficiency of security markets.
q
The paper has benefited from helpful comments and suggestions from an
anonymous referee. All remaining errors are ours.
⇑ Tel.: +1 (806)834 1038; fax: +1 (806)742 3197.
E-mail address: nadia.vozlyublennaia@ttu.edu
1 autocorrelations, which are reported, for example, in Lo and
Fama (1965), for example, find a negative autocorrelation in the short-horizon
individual stock returns. Lo and MacKinlay (1988, 1990) observe positive autocor-
relations in the short-term portfolio returns along with cross-autocorrelations in the
returns of individual securities. Lehman (1990) and Jegadeesh (1990) report return
reversals in stocks. Jegadeesh (1993) observe momentum in the intermediate horizon
returns. DeBondt and Thaler (1985) and Lee and Swaminathan (2000) find negative
return autocorrelations at longer horizons. Bessembinder and Hertzel (1993) report
significant autocorrelations in returns around non-trading days.
probability – that is revealed through an active internet search of
security indexes in several major investment categories. We find
that returns significantly change following an increase in attention,
but this effect lasts only a short period. Conversely, a shock to
index returns, especially a decline, leads to a long-term change in
attention. Given this evidence, we hypothesize that changes in
index returns or the sign of returns in the past indicate the nature
of the information that investors are paying attention to. Therefore,
past returns should influence the effect of attention on the current
returns and volatility. Indeed, we find that the interaction effects
between lagged returns and attention are significant in the regres-
sions for index returns or volatility. This also means that attention
can significantly alter predictability of index returns, based on
their own lagged values. This result reveals an important role of
investor attention in market efficiency if return predictability is
interpreted as a form of inefficiency. Our evidence suggests that
increasing attention of investors diminishes predictability of
returns. We also find that attention diminishes predictability of
returns based on the lagged returns of a different index (cross
MacKinlay (1990)). Overall, these results are in agreement with
the theoretical models such as Grossman and Stiglitz (1980) that
imply additional information, which can be a result of increased
investor attention, improves market efficiency.
Merton (1987) is among the first studies demonstrating that
investor attention matters for security prices; this was followed

0378-4266/$ - see front matter Ó 2013 Elsevier B.V. All rights reserved.
http://dx.doi.org/10.1016/j.jbankfin.2013.12.010
18 N. Vozlyublennaia / Journal of Banking & Finance 41 (2014) 17–35
by Sims (2003), Hirshleifer and Teoh (2003), and Peng and Xiong
(2006), among others. The exact role of information and investor
attention in the market equilibrium and market efficiency, how-
ever, remains elusive. Grossman and Stiglitz (1980)’s seminal work
suggests that more information (a greater number of informed
investors in their model) leads to more informative prices, that
is, a more efficient market. If increased attention leads to more
information absorbed by the market, attention should improve
market efficiency. On the other hand, some researchers, such as
Da et al. (2011a,b), who investigate retail investor attention, argue
that more attention can create extra noise and, consequently,
reduce market efficiency. The problem, in part, is a substantial
difficulty in finding the right measure of attention.
Empirical investigation of the limited investor attention issues
often involves analysis of the news announcements effect (see
Barber and Odean, 2008; Dellavigna and Pollet, 2009).2 The inves-
tigation of the effect of news and mass media on asset returns
exposes several potential issues. For example, as Da et al. (2011a)
points out, there is no guarantee that all the information in mass
media is used by investors. Additionally, media announcements that
contain no new information may appear relevant to security prices
due to the sentiment created by media. Huberman and Regev
(2001) present a good example of how security prices can be
artificially inflated by mass media. Therefore, it is difficult to verify
empirically a connection between security returns, market
efficiency, and investor attention.
Several recent studies introduced a new measure of attention –
Internet search query – into the finance literature (see Da et al.,
2013, 2011b,a; Dzielinski, 2012; Vlastakis and Markellos, 2012;
Ding and Hou, 2013; Joseph et al., 2011; Schmidt, 2012; Mondria
et al., 2010).3 Typically, these papers use stock ticker symbols as
keywords to estimate Internet search probability (attention) for a
given security. The general consensus is that these measures capture
the attention of retail investors. An advantage of Google search prob-
ability over previously used measures of attention, such as news, is
its ability to incorporate actively expressed investor interest as
argued, for instance, in Da et al. (2011a).
Nevertheless, this measure has a problem as well; that is, one
cannot be certain that the agents who search for the information
use it to make trading decisions. Professional security traders will
not search ticker symbol information in Google since most trading
platforms provide all the relevant news coverage within the
system. At the same time, a different group of investors – retail
investors who use professional investment intermediaries – are
more likely to engage in an Internet search to evaluate investment
opportunities. These investors, however, are unlikely to search the
information on individual companies since the investment choice
set offered by financial intermediaries typically includes only
broad market indexes/portfolios. Additionally, less sophisticated
investors who use an Internet search are more constrained in their
abilities to collect and process information, and therefore, are more
likely to confine their attention to broad asset categories (indexes)
rather than individual securities.4 Unlike most of the previous stud-
ies, we investigate investor attention as measured by Internet search
probability in relation to broad market indexes. Furthermore, we uti-
lize indexes’ names instead of ticker symbols as keywords since re-
tail investors are more likely to use the former in an Internet search.
2
A related strand of literature also considers market participants’ under-reaction
due to inattention/distraction (see Corwin and Coughenour, 2008; Hirshleifer et al.,
2009; Dellavigna and Pollet, 2009).
3
Internet search data has been used in non-finance applications as well, including
economics (Askitas and Zimmermann, 2009) and medical studies (Ginsberg et al.,
2009).
4
Peng and Xiong (2006) present a compelling argument in support of this idea.
We obtain Google search query data for several market in-
dexes that receive extensive coverage in the financial sections
of the Internet. In the Stocks category we include the Dow Jones
Industrial Average (Dow) index as a representative of the large
companies. The NASDAQ index accounts for small companies.
The S&P 500 index is a measure of the medium size companies.
For the Bonds category, we use the 10 year Treasury index. To
account for Gold, we include the Chicago Board Options Ex-
change Gold index. Finally, we obtain the West Texas Intermedi-
ate crude oil index to measure returns on Commodities (referred
to as ‘Oil’ or ‘Commodities’). We study the relationship between
return, return volatility, return predictability, and search proba-
bility (investor attention) of each index as well as across
indexes.
We find that attention to an index has a significant short-term
effect on the index return. Depending on the investment horizon,
the return may significantly increase or decrease following a rise
in the attention to the index. This result is consistent with the
hypothesis that uncovered information could be perceived by
investors as indicating a higher or lower return in the future and,
therefore, could lead to either an increase or a decrease in security
returns. This evidence is different from the finding of a positive
price pressure due to an increase in the search probability of indi-
vidual securities observed in Da et al. (2011a) and Joseph et al.
(2011). Da et al. (2011a) offer an explanation of their result based
on Barber and Odean (2008)’s argument that retail investors are
more likely to buy than sell a security that attracted their atten-
tion. In this case, increased attention creates a buying pressure
on prices. Our evidence, on the other hand, supports the hypothesis
that retail investors could create either a positive or negative price
pressure, depending on the nature of the uncovered information.
However, this effect does not last long-term since we find that
an initial change in return is often followed by a subsequent return
reversal. Therefore, our results suggest that retail investors can cre-
ate occasional fluctuations in returns but are unlikely to be respon-
sible for permanent shifts in security prices. This evidence
contributes to the literature that seeks to understand how retail
investor attention affects asset returns (see, for instance, Kumar,
2009; Han and Kumar, 2010).
It is interesting to note that the effects of investor attention are
somewhat different across indexes. For example, a significant
reaction to a change in attention is more likely in large or med-
ium size stock indexes (Dow and S&P 500) and Gold and less
likely in Bonds or NASDAQ. This could be due to the fact that,
although all six indexes are considered the leading indicators of
the market activity, the retail investors pay more attention and
react stronger to the information on the indexes of larger stocks
and Gold, and less to Bonds or small stocks (NASDAQ). We also
observe different response lag across indexes. For instance, it
typically takes a shorter period (1–2 weeks) for Dow or S&P 500
to react to an increase in the searches of information, while for
Gold it takes longer (3–4 weeks). These differences could be due
to the availability of coverage for various indexes. The larger
stocks are typically consistently covered in financial press,
whereas for assets like Gold the news is more sporadic, in which
case it would take longer for investors to analyze potential effects
of the new information.
We also find some indication of a relationship between short-
term volatility and attention, although this evidence is not as
pronounced. Since we observe both positive and negative effects
of retail investor attention on return, our results suggest the pres-
ence of both a destabilizing impact of momentum trades and a sta-
bilizing impact of contrarian trades by retail investors, as discussed
in Foucault et al. (2011). Therefore, the combined impact of atten-
tion on volatility is not as pronounced. Another possible explana-
tion of this result is a low frequency of the search and volatility
 N. Vozlyublennaia / Journal of Banking & Finance 41 (2014) 17–35
data employed. The effects of attention on volatility plausibly
could dissipate in a matter of days.
Additionally, we observe that a change in return, especially a
decline, significantly influences investor attention to securities.
Moreover, unlike the effect of search probability on return, the
reverse effect is long-term in nature. Since attention is influenced
by returns, the sign of the past return or its recent increase/decline
can indicate the nature of the information received by investors,
which in turn, influences the future return. In other words, atten-
tion impacts the ability of the lagged returns to predict the future
index returns. Therefore, analysis of investor attention and its role
in security returns may shed some light on the findings in the lit-
erature on return predictability, which is often attributed to
market inefficiency (see Shiller, 1984; Summers, 1986). We inves-
tigate this hypothesis by including lagged interaction terms be-
tween attention and returns in the regressions.
According to our results, when more attention is paid to an in-
dex, return predictability is weaker. In other words, attention, as
revealed by an active search, leads to a more efficient market.
Additionally, investor attention reduces cross-autocorrelations
among indexes, which are reported in Lo and MacKinlay (1990).
Thus, attention reduces return predictability not only from the
information of the index’s own lagged return, but also from the
lagged return of a different index. Furthermore, when more atten-
tion is devoted to an index, lagged returns have a smaller impact
on index volatility.
This result is in line with the theories predicting that more
information increases efficiency. In Grossman and Stiglitz (1980)
model, for example, a market with more informed investors is
characterized by security prices that better reflect all available
information. Increased attention from investors should lead to a
more efficient collection of information and its incorporation in
the prices of securities. When information is more quickly incorpo-
rated in prices and returns, the returns are less likely to be predict-
able, which is consistent with the evidence observed in our
analysis. At the same time, this evidence is inconsistent with a
view that investor attention destabilizes the markets due to addi-
tional noise trading, as argued in Da et al. (2011a,b). Note, how-
ever, that our results are based on weekly or monthly returns.
The destabilizing effects of attention from noise traders are more
likely to manifest at much shorter horizons, such as a day. If this
is the case, our results are to be expected. In the following sections
we outline the estimation procedures and the results in more
detail.
2. Investor attention and index performance
We begin our analysis of the role of investor attention by inves-
tigating the dynamic relationships between index performance, as
measured by return and volatility, and investor attention for six as-
set indexes in four major investment categories (Stocks, Bonds,
Commodities, and Gold). These indexes have readily available price
and return quotes on the Internet and can be easily accessed by
unsophisticated investors who are likely to use internet search as
a source of information. We include three stock market indexes:
the Dow Jones Industrial Average (Dow), the S&P 500 (S&P 500),
and the NASDAQ composite index (NASDAQ). We also use a bond
index, the Chicago Board Options Exchange 10 Year Treasury Note
Yield Index (Bonds), a Gold index, the Chicago Board Options Ex-
change Gold (Gold), and a Commodities index, the West Texas
Intermediate crude oil (Oil). The stock index return data and the
data on the bond index are obtained from http://www.finance.ya-
hoo.com. The Oil and Gold indexes data come from http://www.y-
charts.com. These sources are available at no cost to any Internet
user.
19
The measure of investor attention is a Google search probability
obtained from Google Trends (http://www.Google.com/trends).
Google reports the percentage of searches for a given keyword of
the total number of searches over time.5 The numbers represent
search probabilities of a given keyword at a given time. The data cov-
ers a weekly period from January 2004 until December 2012. We use
the following Google search keywords: ‘Dow’ (DowSearch ), ‘SP 500’
Search
(S&P 500Search ), ‘NASDAQ’ (NASDAQ Search ), ‘Bond yield’ (Bonds ),
Search Search
‘Gold price’ (Gold ), and ‘Oil price’ (WTIoil ). The choice of
keywords is arbitrary. One potential problem this creates is too
much unrelated noise in the search data, which is less of a concern
as it biases our results towards finding no relationships. More con-
cerning is the possibility that the search variables contain informa-
tion that is related to the indexes for reasons other than financial.
To avoid this problem, we utilized the most parsimonious keyword
combination for each index in order to assure that only relevant
information is captured. All search probability measures are con-
verted into natural logarithms, as in Da et al. (2011a).
Fig. 1 depicts the dynamics of the above search variables. It is
evident from these graphs that investors pay more attention to as-
set indexes during the times of market turmoil. Attention to the
Dow and S&P 500 indexes does not exhibit any visible trends,
but shows spikes during the stock market falls of October 2008
and August 2011. Attention to the NASDAQ has a downward trend
and several spikes, including, those during October 2008 and Au-
gust 2011. It appears that public attention to smaller companies,
represented by the NASDAQ index, has been declining during these
years. Occasional large increases in attention are more frequent in
small companies than in large companies, represented by the Dow
and S&P 500. The attention to Gold, on the other hand, has been
steadily increasing. The financial market turmoils also attracted
attention to Commodities, as indicated, for instance, by the visible
spikes in 2008 and 2011. The attention to Bonds has been very vol-
atile throughout the considered interval and shows no visible
trends.
2.1. Statistical causality between attention and index performance
In the investigation of possible causal relationships between
investor attention and index performance, we employ Granger
Causality tests and Vector Autoregression (VAR) models. As evident
from our previous discussions, the literature presumes that
changes in investor attention should cause changes in security
prices and returns. So far this proposition has been tested in the lit-
erature primarily for individual securities. We check this hypothe-
sis for the major security indexes. Additionally, a change in
security price or return can attract attention of investors. There-
fore, we also consider the effect in the opposite direction, where
changes in index return and volatility cause changes in attention.
Naturally, we can only consider causality in a statistical sense.
Granger Causality between index return (R) and search proba-
bility (S) with n lags is tested in the following model specification:
Rt ¼ d01 þ d11 Rt1 þ . . . þ dn1 Rtn þ /11 St1 þ . . . þ /n1 Stn þ et ; ð1Þ
St ¼ d02 þ d12 Rt1 þ . . . þ dn2 Rtn þ /12 St1 þ . . . þ /n2 Stn þ et : ð2Þ
The null hypothesis that S does not Granger Cause R
(/11 ¼    ¼ /n1 ¼ 0) is tested using the F test in the first equation.
The null hypothesis that R does not Granger Cause S
(d12 ¼    ¼ dn1 ¼ 0) is tested using the F test in the second equation.
The Granger Causality test between volatility and search probability
is performed in the same specification, where return (R) is replaced
5
These probabilities are approximate since Google uses only a subset of all
searches per query in these calculations.
20 N. Vozlyublennaia / Journal of Banking & Finance 41 (2014) 17–35

Fig. 1. Google search probability. This figure plots Google search probability (in logarithms) for the following indexes: Dow Jones Industrial Average (Dow), S&P 500 (SP500),
NASDAQ, 10 year Treasury bond index (Bond), Chicago Board Options Exchange Gold (Gold), and West Texas Intermediate crude oil (Oil). The data on Google search
probabilities is obtained at weekly frequency for January 2004–December 2012.

with volatility (V). We run Granger Causality tests for each index
and across different indexes.
Table 1 reports p-values for pairwise Granger Causality tests of
the relationship between search probabilities and index returns.
The first p-value is reported for the null hypothesis: Index return
does not Granger Cause search probability. The second p-value is
reported for the null hypothesis: Search probability does not Gran-
ger Cause index return. We consider 2 (top panel), 4 (middle pa-
nel), and 6 (bottom panel) lag specifications. As before, search
probabilities are given in the appropriate columns, while index re-
turns are arranged in rows.
Overall, it appears that not only returns are influenced by a
change in attention to the index, but also attention is as likely to
change following changes in the index returns. In addition, these
relationships occur within the same index as well as across differ-
ent indexes. When 2 lags are included in the model specification,
several significant relationships emerge between attention and re-
turns. Stock index return typically Granger Causes attention to the
same index as well as to other indexes, except NASDAQ. The
reverse direction is not as pronounced: search probability for
Dow influences only S&P 500 return, NASDAQ search affects
changes in NASDAQ returns, while S&P 500 search does not influ-
ence returns on any of the considered stock indexes. Attention to
Oil and Oil returns exhibit causality in both directions. Oil returns
impact attention to Dow, while Dow returns affect the search
likelihood of Oil. The only causal relationship in Bonds and Gold
categories is observed for Gold returns, which influence the future
search of Gold index.
Including four lags in the specification reveals several additional
relationships. All three stock indexes exhibit connections between
search probabilities and returns, where causality runs in both
directions. The only exception is NASDAQ return, which does not
Granger Cause search probability for any of the considered indexes.
Returns on Stocks also influence search probability of Gold, but not
 N. Vozlyublennaia / Journal of Banking & Finance 41 (2014) 17–35 21

Table 1 Table 2
Pairwise Granger causality tests for search probabilities and index returns. Pairwise Granger causality tests for search probabilities and return volatilities.

Dow S&P 500 NASDAQ Bonds Gold WTIoil Dow S&P 500 NASDAQ Bonds Gold WTIoil
Dow 0.001 0.003 0.304 0.874 0.359 0.450 Dow 0.594 0.056 0.131 0.046 0.319 0.954
0.125 0.493 0.120 0.939 0.883 0.100 0.081 0.318 0.358 0.062 0.154 0.000
S&P 500 0.001 0.001 0.246 0.954 0.253 0.629 S&P 500 0.512 0.063 0.142 0.039 0.344 0.921
0.061 0.580 0.176 0.962 0.706 0.148 0.297 0.252 0.418 0.041 0.241 0.000
NASDAQ 0.005 0.001 0.276 0.989 0.206 0.654 NASDAQ 0.715 0.126 0.157 0.049 0.311 0.906
0.128 0.473 0.048 0.889 0.849 0.398 0.164 0.252 0.338 0.035 0.178 0.001
Bonds 0.699 0.784 0.970 0.319 0.118 0.942 Bonds 0.214 0.321 0.129 0.006 0.766 0.783
0.337 0.588 0.843 0.930 0.784 0.597 0.066 0.993 0.693 0.312 0.020 0.121
Gold 0.605 0.460 0.967 0.939 0.010 0.112 Gold 0.950 0.146 0.211 0.124 0.292 0.920
0.747 0.973 0.727 0.977 0.225 0.740 0.008 0.570 0.307 0.222 0.280 0.000
WTIoil 0.960 0.805 0.279 0.212 0.760 0.003 WTIoil 0.012 0.003 0.761 0.008 0.685 0.506
0.053 0.244 0.231 0.208 0.157 0.008 0.101 0.257 0.505 0.686 0.517 0.000
Dow 0.010 0.007 0.473 0.698 0.051 0.728 Dow 0.018 0.002 0.118 0.044 0.395 0.993
0.001 0.065 0.067 0.552 0.022 0.077 0.474 0.616 0.797 0.100 0.481 0.000
S&P 500 0.009 0.004 0.367 0.792 0.055 0.888 S&P 500 0.006 0.001 0.086 0.037 0.378 0.978
0.000 0.023 0.097 0.458 0.014 0.128 0.788 0.503 0.851 0.079 0.700 0.000
NASDAQ 0.033 0.003 0.423 0.749 0.095 0.910 NASDAQ 0.052 0.007 0.143 0.059 0.427 0.954
0.001 0.016 0.038 0.246 0.167 0.385 0.465 0.517 0.693 0.086 0.508 0.000
Bonds 0.766 0.546 0.971 0.460 0.087 0.815 Bonds 0.230 0.022 0.170 0.012 0.548 0.968
0.221 0.641 0.643 0.582 0.833 0.681 0.287 0.810 0.752 0.761 0.021 0.104
Gold 0.285 0.274 0.721 0.518 0.003 0.198 Gold 0.028 0.005 0.111 0.038 0.448 0.996
0.002 0.000 0.366 0.587 0.067 0.651 0.060 0.875 0.666 0.184 0.130 0.000
WTIoil 0.629 0.324 0.366 0.604 0.169 0.012 WTIoil 0.076 0.094 0.827 0.017 0.337 0.877
0.056 0.150 0.380 0.220 0.069 0.028 0.020 0.117 0.229 0.146 0.861 0.000
Dow 0.016 0.008 0.329 0.880 0.124 0.452 Dow 0.025 0.000 0.123 0.017 0.323 0.998
0.002 0.118 0.168 0.697 0.042 0.204 0.259 0.392 0.661 0.036 0.239 0.001
S&P 500 0.013 0.002 0.234 0.926 0.142 0.652 S&P 500 0.022 0.000 0.146 0.024 0.333 0.989
0.000 0.034 0.195 0.577 0.032 0.302 0.557 0.339 0.779 0.046 0.302 0.001
NASDAQ 0.028 0.001 0.302 0.931 0.238 0.711 NASDAQ 0.079 0.001 0.151 0.033 0.276 0.977
0.000 0.024 0.111 0.423 0.295 0.555 0.480 0.511 0.751 0.074 0.289 0.002
Bonds 0.434 0.353 0.803 0.492 0.165 0.429 Bonds 0.182 0.024 0.301 0.036 0.645 0.926
0.368 0.862 0.755 0.764 0.524 0.704 0.271 0.855 0.798 0.693 0.099 0.262
Gold 0.790 0.367 0.705 0.678 0.023 0.318 Gold 0.193 0.007 0.316 0.058 0.324 0.755
0.001 0.001 0.203 0.700 0.074 0.690 0.159 0.736 0.903 0.082 0.355 0.000
WTIoil 0.954 0.118 0.646 0.337 0.205 0.026 WTIoil 0.037 0.039 0.760 0.032 0.515 0.851
0.078 0.094 0.174 0.272 0.093 0.024 0.023 0.168 0.246 0.219 0.814 0.000

This table reports the p-values for Granger causality tests on Google search prob-
abilities and index returns. The indexes include Dow Jones Industrial Average
(Dow), S&P 500 index, NASDAQ, 10 year Treasury bond index (Bonds), Chicago
Board Options Exchange Gold (Gold), and West Texas Intermediate crude oil
(WTIoil). The data on index returns and Google search probabilities is obtained at
weekly frequency for January 2004–December 2012. The first p-value refers to the
null hypothesis: Index return does not Granger Cause search probability. The sec-
ond p-value is given for the null hypothesis: Search probability does not Granger
Cause index return. The top panel includes 2 lags specification, while the middle
and bottom panels include 4 and 6 lags specifications, respectively.
This table reports the p-values for Granger causality tests on Google search prob-
abilities and index return volatilities. The indexes include Dow Jones Industrial
Average (Dow), S&P 500 index, NASDAQ, 10 year Treasury bond index (Bonds),
Chicago Board Options Exchange Gold (Gold), and West Texas Intermediate crude
oil (WTIoil). The data on Google search probabilities is obtained at weekly fre-
quency for January 2004–December 2012. Volatilities cover the same interval at
monthly frequency. The first p-value refers to the null hypothesis: Index return
volatility does not Granger Cause search probability. The second p-value is given for
the null hypothesis: Search probability does not Granger Cause index return vola-
tility. The top panel includes 2 lags specification, while the middle and bottom
panels include 4 and 6 lags specifications, respectively.

the attention to Bonds or Commodities. Returns on Bonds and Gold

are likely to impact the attention to Gold, while return on Oil has
an effect on the attention to its own index. Search probability of
Gold keywords impacts returns on all of the considered indexes.
Oil attention Granger Causes returns on Oil and Dow. Attention
to S&P 500 and Dow has an impact on Gold returns, while attention
to Dow influences returns on Gold and Commodity indexes.
Including six lags reduces the significance of several relation-
ships in comparison to the four lag specification, suggesting that
the model may be over-specified in terms of the number of lags.
The results are changed in some cases for Oil, Gold, and NASDAQ.
Therefore, we report only the results with four lags in the analysis
of the remaining model specifications.
We have seen so far that attention typically has an impact on
index returns and is, in turn, influenced by the past fluctuations
in returns. We refer next to the results of Granger Causality tests
between volatility and search probability given in Table 2, which
is structured the same as Table 1. Overall, Dow, S&P 500, and Oil
indexes play an important role in these relationships. Additionally,
the role of Bonds is more pronounced in this setting. When two
lags are included in the tests, Dow return volatility influences
searches of Dow index, Bonds, and Oil. Volatility of S&P 500 has
an effect on the searches of S&P 500, Bonds, and Oil indexes.
NASDAQ volatility is related to the investor attention to Bonds
and Oil. The volatility of Bonds affects attention to Dow and Gold.
Oil volatility has an impact on the searches for Dow and Oil. The
reverse causality is somewhat less likely. Dow search impacts only
the volatility of Oil. S&P 500 search probability has an effect on S&P
500, Dow, and Oil volatility. Bonds’ search is related to the volatil-
ity of all the indexes but Gold. We hypothesize that a weak
relationship between the past attention and volatility is due to
22 N. Vozlyublennaia / Journal of Banking & Finance 41 (2014) 17–35

the adopted frequency of the volatility measures in our analysis
(monthly). The effect of attention on index fluctuations is more
likely revealed over a shorter horizon, such as several days.
As before, including four lags highlights more of the significant
relationships. For instance, Gold volatility is now related to the
search probability of Dow. Attention to S&P 500 is linked to the
past volatility of NASDAQ, Bonds, and Gold, while Gold volatility
has an effect on attention to Bonds. Including six lags only margin-
ally changes the results (for Gold volatility and Dow search, S&P
500 volatility and NASDAQ search, S&P 500 volatility and Bonds
search). Therefore, volatility can cause changes in attention,
but attention is less likely to impact volatility. These relationships,
as before, may occur within the same index as well as across
indexes.
2.2. Sign, timing, and persistence of attention effects
Granger Causality tests, though informative about statistical
causality, cannot determine the sign and timing of the relationship
or how quickly the impact dissipates. To answer these questions,
we refer next to the VAR estimation results and the corresponding
impulse response functions. We use the following VAR model:
X t ¼ a0 þ a1 Xt1 þ    þ a2 Xtn þ t ;
where vector X contains index returns/volatilities and the appropri-
ate search variables. The VAR specification allows us to investigate
the reaction of each variable to the shocks in the remaining
variables over time within the impulse response function frame-
work. To keep the model and tables parsimonious, we do not
consider cross-index relationships in the VAR specifications.
Furthermore, we include a robustness test with additional macro-
economic variables in order to account for the exogenous
economy-wide shifts in the investment opportunities (see Petkova
(2006) for a related discussion). The macroeconomic variables come
from the following sources. The default spread (DEFSP), term spread
(TERMSP), and one-year Treasury Bill rate (RF) are from the Federal
Reserve Economic Data (Federal Reserve Bank in Saint Louis), while
the aggregate dividend yield (AGGDIV) is obtained from the Center
for Research in Security Prices.
Table 3 summarizes the estimates for the VAR for each index
return and the corresponding search probability. The VAR results
for each index are given in the appropriate two columns, first of
which contains the regression coefficients with return as the
dependent variable, while the second column gives the results
for the equation with search as the dependent variable. We present
only the specification with four lags for conciseness. As noted ear-
lier, the two lag models generally reveal fewer significant relation-
ships than the four lag models, while including six lags does not
significantly alter the conclusions. Figs. 2 and 3 depict the impulse
response functions for the VAR models from Table 3.
In the case of stock indexes, attention has a significant impact
on future returns, which can be positive or negative depending
on how much time has elapsed since the impact. This effect typi-
cally does not last very long. Further, a decline in returns increases
attention in the long run. An increase in the attention to large com-
pany stocks (Dow search probability) has an immediate negative
ð3Þ impact on its return (the first lag of search is significant), and a
delayed positive impact on return (the fourth lag of search is signif-
icant). The quick response of large stocks to investor attention can
be due to the availability of ample coverage on the index, which al-
lows investors process the information fairly quickly. The impulse
response function in Fig. 2 suggests that this impact is temporary,
i.e., it converges to zero after a few periods. This result also sup-
ports the idea that the information on large stocks is analyzed
fairly quickly. Dow return has an immediate negative effect on
Dow search (the first lag of return is significant). Moreover, the

Table 3
VAR for search probability and index return.

Dow S&P 500 NASDAQ Bonds Gold WTIoil

Rt St Rt St Rt St Rt St Rt St Rt St
Intercept 0.001 0.289 0.002 0.768 0.005 0.232 0.001 1.414 0.005 0.063 0.009 0.121
(0.002) (0.061)⁄⁄⁄ (0.005) (0.137)⁄⁄⁄ (0.003)⁄ (0.069)⁄⁄⁄ (0.010) (0.209)⁄⁄⁄ (0.003)⁄ (0.037)⁄ (0.003)⁄⁄⁄ (0.050)⁄⁄
Rt1 0.145 6.361 0.105 4.819 0.063 2.300 0.106 1.487 0.047 1.129 0.159 2.556
(0.048)⁄⁄⁄ (1.749)⁄⁄⁄ (0.047)⁄⁄ (1.297)⁄⁄⁄ (0.047) (1.274)⁄ (0.047)⁄⁄ (1.008) (0.047) (0.636)⁄ (0.047)⁄⁄⁄ (0.844)⁄⁄⁄
Rt2 0.023 1.078 0.001 1.344 0.021 0.039 0.123 0.483 0.045 1.765 0.060 1.814
(0.049) (1.773) (0.048) (1.308) (0.047) (1.273) (0.048)⁄⁄⁄ (1.014) (0.047) (0.638)⁄⁄⁄ (0.048) (0.860)⁄⁄
Rt3 0.155 0.724 0.112 0.544 0.067 0.060 0.037 1.052 0.000 0.824 0.041 1.192
(0.049)⁄⁄⁄ (1.754) (0.048)⁄⁄ (1.303) (0.047) (1.270) (0.048) (1.015) (0.047) (0.640) (0.048) (0.864)
Rt4 0.061 0.275 0.034 0.871 0.025 0.828 0.052 0.583 0.012 1.514 0.058 0.148
(0.047) (1.708) (0.047) (1.295) (0.047) (1.268) (0.047) (1.010) (0.047) (0.638)⁄⁄ (0.047) (0.854)
St1 0.004 0.728 0.003 0.574 0.003 0.794 0.001 0.496 0.001 0.804 0.002 0.898
(0.001)⁄⁄⁄ (0.049)⁄⁄⁄ (0.002)⁄ (0.048) (0.002)⁄ (0.047)⁄⁄⁄ (0.002) (0.047)⁄⁄⁄ (0.003) (0.046)⁄⁄⁄ (0.003) (0.047)⁄⁄⁄
St2 0.001 0.138 0.002 0.080 0.002 0.119 0.002 0.019 0.004 0.086 0.002 0.082
(0.002) (0.060)⁄⁄ (0.002) (0.054) (0.002) (0.060)⁄⁄ (0.002) (0.053) (0.004) (0.060) (0.003) (0.063)
St3 0.001 0.028 0.002 0.123 0.002 0.185 0.004 0.073 0.004 0.037 0.004 0.129
(0.002) (0.059) (0.002) (0.054)⁄⁄ (0.002) (0.060)⁄⁄⁄ (0.002)⁄ (0.053) (0.004) (0.060) (0.003) (0.063)⁄⁄
St4 0.004 0.013 0.003 0.010 0.001 0.062 0.002 0.045 0.008 0.052 0.003 0.009
(0.001)⁄⁄⁄ (0.048) (0.002)⁄⁄ (0.047) (0.002) (0.047) (0.002) (0.048) (0.003)⁄⁄ (0.046) (0.003) (0.047)

R2 0.063 0.776 0.041 0.557 0.029 0.804 0.039 0.302 0.023 0.937 0.049 0.870

This table reports VAR estimation results for Google search probability (St ) and index return (Rt ). The indexes include Dow Jones Industrial Average (Dow), S&P 500 index,
NASDAQ, 10 year Treasury bond index (Bonds), Chicago Board Options Exchange Gold (Gold), and West Texas Intermediate crude oil (WTIoil). The data on index returns and
Google search probabilities is obtained at weekly frequency for January 2004–December 2012. VAR for each index is arranged in two columns: the return equation is given in
the first column, the search probability equation is given in the second column. All VAR specifications contain 4 lags. Estimated coefficients are followed by the standard
errors in parenthesis.
⁄
Coefficient significance level at 10%.
⁄⁄
Coefficient significance level at 5%.
⁄⁄⁄
Coefficient significance level at 1%.
 N. Vozlyublennaia / Journal of Banking & Finance 41 (2014) 17–35 23

Fig. 2. Impulse response function for VAR of Stock index return and search probability. This figure plots impulse response to Cholesky one standard deviation innovations ±2
standard errors (dashed lines). The VAR (with 4 lags) includes the index return and the corresponding search probability. The stock indexes are: The Dow Jones Industrial
Average (Dow), S&P 500, and NASDAQ. The data on index returns and Google search probabilities is obtained at weekly frequency for January 2004–December 2012.

impulse response function suggests that this impact is highly
pronounced and dissipates in time very slowly. In other words, a
negative sign coming from a decrease in large company stocks is
remembered by the market long-term. S&P 500 shows similar
behavior, while the results for NASDAQ are similar with one
exception: the fourth lag of search is insignificant. In the two lag
specification, NASDAQ search and return relationships loose
significance.
Bonds, Gold, and Commodities show fewer links with search
probabilities than Stocks. Bonds returns are driven up by attention,
but this impact is marginal (only the third lag of Search is margin-
ally significant) and converges to zero after a few periods (see
Fig. 3). Unlike Stocks, Bonds search is not affected by Bonds return.
Gold return is influenced by the fourth lag of Gold search and this
impact is short-lived according to the impulse response function.
We hypothesize that the delayed response of Gold return is due
to the smaller coverage available for the index (as compared to
large company stocks, for example), in which case it takes longer
for investors to analyze the acquired information. A higher Gold re-
turn has a strong positive impact on its search at the first, second,
and fourth lag. As the impulse response function suggests, this ef-
fect takes a long time to disappear. Oil returns are not influenced
by the attention to Oil, while its search probability does increase
returns (the first and second lags of search are significant) and this
effect is quite persistent (see impulse response function). Changing
the number of lags in the VAR does not significantly alter these
conclusions. With two lags, Bonds do not exhibit any of the signif-
icant relationships between search probability and returns. In the
24 N. Vozlyublennaia / Journal of Banking & Finance 41 (2014) 17–35

Fig. 3. Impulse response function for VAR of Bond, Gold and Oil index return and search probability. This figure plots impulse response to Cholesky one standard deviation
innovations ±2 standard errors (dashed lines). The VAR (with 4 lags) includes the index return and the corresponding search probability. The indexes are: 10 year Treasury
bond index (Bonds), Chicago Board Options Exchange Gold (Gold), and West Texas Intermediate crude oil (Oil). The data on index returns and Google search probabilities is
obtained at weekly frequency for January 2004–December 2012.

six lag specification, the 6th lag of Oil search increases Oil return
(in untabulated results).
Table 4 repeats the above VAR models with macro variables in-
cluded as controls. The changes we observe in this specification in
comparison to the previous results are primarily in the sign and
timing of the effect. For instance, Dow and S&P 500 return is
now positively influenced by the searches performed two weeks
earlier. NASDAQ return is not affected by attention. Of all three
stock indexes, only S&P 500 search probability is positively influ-
enced by the return one week earlier. More relationships emerge
in this specification for Bonds, Gold, and Commodities. Gold return
increases three weeks after an increase in its search probability,
and decreases during the 4th week. Oil return declines after one
week following an increase in the number of searches. High Bond
return leads to more attention to Bonds after one week, followed
by a decrease in attention after two weeks. Gold and Oil returns in-
crease attention to the respective indexes with a three weeks’ lag.
Additionally, a change in Oil return has an impact on Oil attention a
week after.
The results so far indicate that attention can impact returns
within the same index or across indexes, the effect can be positive
or negative depending on when it occurred, but is typically short-
lived. Some indexes – large company stocks or Gold for example –
are more likely to experience an effect of investor attention then
others – such as small company stocks or Bonds. This could be
due to retail investors paying more attention (or reacting) to the
Table 4
VAR for search probability and index return with macro variables.

Dow S&P 500 NASDAQ Bonds Gold WTIoil

Rt St Rt St Rt St Rt St Rt St Rt St
Intercept 0.007 2.635 0.010 3.836 0.006 1.351 0.045 5.774 0.012 0.926 0.009 0.694
(0.004)⁄⁄ (0.525)⁄⁄⁄ (0.008) (0.780)⁄⁄⁄ (0.006) (0.477)⁄⁄⁄ (0.024)⁄ (0.977)⁄⁄⁄ (0.009) (0.502)⁄⁄ (0.005)⁄⁄ (0.355)⁄⁄
Rt1 0.035 16.482 0.159 18.853 0.098 0.442 0.078 10.586 0.243 1.402 0.071 15.450
(0.110) (15.681) (0.108) (9.927)⁄ (0.109) (9.093) (0.110) (4.452)⁄⁄ (0.096)⁄⁄ (5.393) (0.105) (7.341)⁄⁄
Rt2 0.201 8.413 0.153 6.407 0.124 0.949 0.325 8.184 0.076 7.376 0.027 1.911
(0.111)⁄ (15.721) (0.113) (10.364) (0.112) (9.391) (0.113)⁄⁄⁄ (4.561)⁄ (0.098) (5.485) (0.109) (7.637)

N. Vozlyublennaia / Journal of Banking & Finance 41 (2014) 17–35

Rt3 0.094 8.023 0.148 8.243 0.024 13.133 0.115 0.276 0.021 10.946 0.055 16.742
(0.107) (15.151) (0.111) (10.169) (0.113) (9.432) (0.114) (4.621) (0.104) (5.829)⁄ (0.110) (7.707)⁄⁄
Rt4 0.137 6.735 0.134 6.446 0.069 0.266 0.047 5.148 0.083 2.959 0.055 10.857
(0.107) (15.143) (0.114) (10.448) (0.116) (9.673) (0.111) (4.510) (0.098) (5.489) (0.112) (7.901)
St1 3.5  104 0.190 1.5  104 0.019 0.001 0.264 0.003 0.087 0.003 0.527 0.003 0.599
(8.1  104) (0.115)⁄ (1.2  103) (0.108) (1.3  103) (0.109)⁄⁄ (2.5  103) (0.103) (0.002)⁄ (0.106)⁄⁄⁄ (0.001)⁄⁄ (0.103)⁄⁄⁄
St2 2.3  103 0.118 2.2  103 0.045 6.2  104 0.196 2.1  103 0.108 2.5  105 0.166 6.6  104 0.123
(7.6  104)⁄⁄⁄ (0.108) (1.0  103)⁄⁄ (0.096) (1.2  103) (0.103)⁄ (2.5  103) (0.101) (2.1  103) (0.120) (1.6  103) (0.112)
St3 4.4  104 0.065 1.8  104 0.217 9.2  104 0.178 2.5  103 0.039 4.3  103 0.155 2.1  103 0.258
(7.6  104) (0.109) (1.1  103) (0.099)⁄⁄ (1.3  103) (0.105)⁄ (2.4  103) (0.096) (2.1  103)⁄⁄ (0.119) (1.6  103) (0.110)⁄⁄
St4 8.3  104 0.059 7.2  104 0.066 9.1  105 0.007 1.1  103 0.126 4.3  103 0.006 1.3  104 0.244
(7.1  104) (0.101) (1.1  103) (0.100) (1.2  103) (0.102) (2.3  103) (0.094) (1.9  103)⁄⁄ (0.106) (1.5  103) (0.102)⁄⁄
AGGDIV 0.184 74.775 0.409 45.449 0.564 67.041 0.264 54.348 1.240 26.768 0.455 117.097
(0.355) (50.440) (0.422) (38.786) (0.501) (41.926) (0.821) (33.236) (0.911) (51.262) (0.819) (57.564)⁄⁄
DEFSP 1.4  103 0.308 6.2  104 0.106 5.1  104 0.056 5.0  104 0.063 1.5  103 0.015 1.4  103 0.153
(5.2  104)⁄⁄⁄ (0.074)⁄⁄⁄ (4.1  104) (0.037)⁄⁄⁄ (4.3  104) (0.036) (6.0  104) (0.024)⁄⁄⁄ (7.3  104)⁄⁄ (0.041) (1.2  103) (0.081)⁄
TERMSP 4.5  104 0.136 4.0  104 0.105 1.7  104 0.049 1.9  104 0.034 1.5  104 0.040 1.5  103 0.066
(3.5  104) (0.050)⁄⁄⁄ (4.2  104) (0.039)⁄⁄⁄ (5.1  104) (0.043) (8.0  104) (0.032) (8.9  104) (0.050) (8.4  104) (0.059)
RF 3.1  104 0.081 4.6  104 0.114 1.5  104 0.088 3.2  104 0.009 2.7  104 0.057 1.3  103 0.067
(2.7  104) (0.039)⁄⁄ (3.7  104) (0.034)⁄⁄⁄ (5.1  104) (0.043)⁄⁄ (6.2  104) (0.025) (8.3  104) (0.046) (7.1  104)⁄ (0.050)

R2 0.217 0.609 0.159 0.389 0.073 0.664 0.124 0.250 0.219 0.821 0.161 0.733

This table reports VAR estimation results for Google search probability (St ) and index return (Rt ). The indexes include Dow Jones Industrial Average (Dow), S&P 500 index, NASDAQ, 10 year Treasury bond index (Bonds), Chicago
Board Options Exchange Gold (Gold), and West Texas Intermediate crude oil (WTIoil). The macroeconomic control variables are: default spread (DEFSP), term spread (TERMSP), one-year Treasury Bill rate (RF) and aggregate
dividend yield (AGGDIV). The data is obtained at monthly frequency for interval January 2004–December 2012. VAR for each index is arranged in two columns: the return equation is given in the first column (Ret), the search
probability equation is given in the second column (Search). All VAR specifications contain 4 lags. Estimated coefficients are followed by the standard errors in parenthesis.
⁄
Coefficient significance level at 10%.
⁄⁄
Coefficient significance level at 5%.
⁄⁄⁄
Coefficient significance level at 1%.

25
 26
Table 5
VAR for search probability and index volatility.

Dow S&P 500 NASDAQ Bonds Gold WTIoil

Vt St Vt St Vt St Vt St Vt St Vt St
Intercept 2.7  105 1.557 9.8  104 2.159 1.3  104 0.548 1.3  103 5.315 2.6  104 0.303 2.3  103 0.557
(4.3  104) (0.580)⁄⁄⁄ (9.2  104) (0.749)⁄⁄⁄ (3.4  104) (0.315) (1.5  103) (1.027)⁄⁄⁄ (6.4  104) (0.211) (5.2  104)⁄⁄⁄ (0.375)

N. Vozlyublennaia / Journal of Banking & Finance 41 (2014) 17–35

V t1 0.771 427.839 1.043 292.897 0.815 30.363 0.742 121.097 1.005 2.321 0.412 3.573
(0.150)⁄⁄⁄ (200.632)⁄⁄ (0.115)⁄⁄⁄ (94.145)⁄⁄⁄ (0.113)⁄⁄⁄ (106.613) (0.102)⁄⁄⁄ (69.979)⁄ (0.105)⁄⁄⁄ (34.881) (0.090)⁄⁄⁄ (64.499)
V t2 0.260 327.662 0.324 98.570 0.078 93.600 0.198 83.480 0.535 51.322 0.083 64.352
(0.171) (228.004) (0.156)⁄⁄ (127.215) (0.145) (136.385) (0.129) (88.294) (0.144)⁄⁄⁄ (47.609) (0.092) (65.592)
V t3 0.111 178.857 0.047 275.629 0.036 190.866 0.026 8.924 0.327 17.348 0.400 26.803
(0.162) (216.199) (0.152) (124.222)⁄⁄ (0.142) (133.329) (0.128) (87.636) (0.143)⁄⁄ (47.340) (0.092)⁄⁄⁄ (65.407)
V t4 0.089 416.974 0.049 209.930 0.039 147.078 0.076 73.571 0.125 12.757 0.446 2.637
(0.126) (168.182)⁄⁄ (0.110) (89.921)⁄⁄ (0.108) (101.802) (0.105) (72.101) (0.101) (33.438) (0.083)⁄⁄⁄ (59.524)
St1 1.8  104 0.276 1.9  104 0.003 7.6  105 0.294 5.6  105 0.003 6.0  104 0.551 3.1  104 0.578
(1.1  104) (0.146)⁄ (1.4  104) (0.112) (1.2  104) (0.112)⁄⁄⁄ (1.5  104) (0.102) (3.2  104)⁄ (0.106)⁄⁄⁄ (1.4  104)⁄⁄ (0.102)⁄⁄⁄
St2 1.1  104 0.120 1.3  104 0.107 1.7  104 0.288 1.9  104 0.031 8.4  105 0.237 1.3  105 0.238
(1.0  104) (0.140) (1.3  104) (0.103) (1.2  104) (0.111)⁄⁄⁄ (1.5  104) (0.100) (3.6  104) (0.118)⁄⁄ (1.6  104) (0.115)⁄⁄
St3 1.3  106 0.332 4.8  105 0.481 4.0  105 0.321 2.8  105 0.117 7.7  104 0.188 5.8  105 0.261
(1.0  104) (0.139)⁄⁄ (1.2  104) (0.102)⁄⁄⁄ (1.2  104) (0.111)⁄⁄⁄ (1.4  104) (0.099) (3.6  104)⁄⁄ (0.118) (1.6  104) (0.116)⁄⁄
St4 6.0  105 0.140 9.1  105 0.016 3.7  105 0.025 1.7  105 0.096 2.0  104 0.037 2.6  104 0.203
(1.1  104) (0.142) (1.4  104) (0.112) (1.2  104) (0.110) (1.4  104) (0.098) (3.3  104) (0.110) (1.5  104)⁄ (0.109)⁄

R2 0.579 0.520 0.626 0.328 0.571 0.634 0.689 0.156 0.632 0.816 0.729 0.672

This table reports VAR estimation results for Google search probability (St ) and index return volatility (V t ). The indexes include Dow Jones Industrial Average (Dow), S&P 500 index, NASDAQ, 10 year Treasury bond index (Bonds),
Chicago Board Options Exchange Gold (Gold), and West Texas Intermediate crude oil (WTIoil). The data on Google search probabilities and volatilities is obtained at monthly frequency for January 2004–December 2012. VAR for
each index is arranged in two columns: the volatility equation is given in the first column (Vol), the search probability equation is given in the second column (Search). All VAR specifications contain 4 lags. Estimated coefficients
are followed by the standard errors in parenthesis.
⁄
Coefficient significance level at 10%.
⁄⁄
Coefficient significance level at 5%.
⁄⁄⁄
Coefficient significance level at 1%.
 N. Vozlyublennaia / Journal of Banking & Finance 41 (2014) 17–35 27

Fig. 4. Impulse response function for VAR of Stock index volatility and search probability. This figure plots impulse response to Cholesky one standard deviation innovations
±2 standard errors (dashed lines). The VAR (with 4 lags) includes the index volatility and the corresponding search probability. The stock indexes are: The Dow Jones
Industrial Average (Dow), S&P 500, and NASDAQ. The data on index volatilities and Google search probabilities is obtained at monthly frequency for January 2004–December
2012.

information on such indexes as Dow or Gold. In the opposite direc-
tion, returns are likely to impact attention and this effect usually
lasts long-term. We investigate next the relationship between in-
dex volatility and search probability within the VAR models. Table
5 summarizes the VAR estimation results, which are arranged sim-
ilar to the previous table, except that volatility now replaces return.
As before, we report the results for the four lag specification. Figs. 4
and 5 present the respective impulse response functions.
The numbers in the table suggest that stock index volatility can
sometimes influence attention, while the reverse effect is less
likely, in agreement with our previous results. The first and fourth
lags of search probability are the significant determinants of the
volatility of the Dow, and the effect is positive. The volatility of
S&P 500 rises one week after an increase in its attention, followed
by a decrease after three weeks, and by another increase after four
weeks. The reverse causal effect is not present in these indexes. The
NASDAQ index does not show any significant relationships
between volatility and attention. In the six lag specification, how-
ever, the Dow search probability does have a positive impact on its
volatility at the first lag and a negative impact at the 5th lag (in
untabulated results). Similarly, in the S&P 500 index regressions
with six lags, the 5th lag of search has a significant negative coef-
ficient. As impulse response functions indicate (see Fig. 4), none of
these effects lasts long-term.
Similar to Stocks, Bonds volatility increases its attention, as
measured by Google search probability. This effect is immediate
(the first lag of volatility is significant), but not long lasting (as
indicated by Fig. 5). Contrary to Stocks or Bonds, attention to Gold
28 N. Vozlyublennaia / Journal of Banking & Finance 41 (2014) 17–35

Fig. 5. Impulse response function for VAR of Bond, Gold and Oil index volatility and search probability. This figure plots impulse response to Cholesky one standard deviation
innovations ±2 standard errors (dashed lines). The VAR (with 4 lags) includes the index volatility and the corresponding search probability. The indexes are: 10 year Treasury
bond index (Bonds), Chicago Board Options Exchange Gold (Gold), and West Texas Intermediate crude oil (Oil). The data on index volatilities and Google search probabilities
is obtained at monthly frequency for January 2004–December 2012.

and Oil influences their volatility, but not the other way around.
Increased search probability for Gold first increases, but later
decreases its volatility (the first lag is significant positive and the
third lags is significant negative). This effect is not persistent over
time as indicated by Fig. 5. Oil searches increase its index volatility
in the long-run (the first and fourth lags are significant positive, see
also the corresponding impulse response function).
Adding macro variables as controls to the above VAR models
only marginally changes the results (untabulated). The attention
to Dow is reduced one week after an increase in its volatility.
Two weeks after an increase in the attention to Dow, its volatility
drops. The results for S&P 500 and NASDAQ are similar to what has
been previously observed. Volatility of Gold is decreased three
weeks after an increase in its search probability, while its search
probability is decreased four weeks after an increase in volatil-
ity. Commodities do not exhibit any connections between volatility
and attention in this specification. Overall, it appears that volatility
is not as strongly associated with investor attention as index
return.
The dynamic relationships we observe between investor atten-
tion, returns, and volatility may be governed by several underlying
factors. In the remaining analysis, we investigate one possible fac-
tor, namely, an interaction between investor attention and past in-
dex returns as a measure of the information that investors pay
attention to. We also discuss these effects in the context of market
inefficiency as revealed by the predictability of index returns based
on their own lagged values or the lagged returns of a different index.
3. Attention and predictability of index returns
We have observed so far that investor attention as measured by
Google search probability has an impact on the future index return
and in some cases on index volatility. Our results also suggest that
 N. Vozlyublennaia / Journal of Banking & Finance 41 (2014) 17–35
attention in turn can be influenced by the past index performance
(return or volatility). In particular, decreasing returns in the past
are likely to draw considerable attention to the respective index.
Therefore, past returns must be a part of the information the mar-
ket receives (and reacts to). For example, a decreasing or negative
return on an index could be perceived as ‘‘bad news’’ by investors.
Furthermore, the impact of attention on the future index return
should depend on the type of information received by the market.
In order to account for this effect, we include the interaction
terms between lagged attention and returns in the model. We con-
sider two types of interaction: (1) between past attention and a
dummy, which is equal to 1 if lagged return is negative, and 0
otherwise; and (2) between lagged attention and lagged return.
The first approach allows us to observe the difference in the effect
of attention when the past return is positive and when it is nega-
tive. The second approach accounts for the impact of an increas-
ing/decreasing past return on the effect of attention. We adopt
these two models in order to incorporate both possibilities of what
the market may consider as ‘‘news’’: a change in the sign of returns
or a change in the returns’ values.
The first model is specified as follows:
X
4 X
4 X
4
Rit ¼ wi þ ail Ritl þ bil Sitl þ cil Sitl  DðRitl < 0Þ þ eit ;
l¼1 l¼1 l¼1
where dummy DðRit < 0Þ is equal to 1 if index i’s return is negative,
and 0 otherwise. As before, we include four lags in these specifica-
tions. The coefficients on the interaction terms (c) measure the
change in the coefficients on attention (b) when the lagged return
is negative. The interaction terms also measure the role of investor
attention in market efficiency. Provided that the effect of past re-
turn on current return is an indication of market inefficiency, the
above interaction terms measure how return predictability changes
with attention. If the interaction terms in regression (4) are signif-
icant, the sign of the past return has an impact on the current index
return and the magnitude of this impact depends on investor atten-
tion. Additionally, we present the results of the above regressions
with macroeconomic variables included to control for possible
shifts in the investment opportunities. Table 6 presents the results
of these regressions for weekly returns of each index with and with-
out macro variables included in the model.
The results indicate that the interaction terms are significant for
four out of six indexes, suggesting that the sign of index return in
the past can determine the magnitude of the impact of investor
attention on the index return at present. For large company stocks
(Dow index), if past returns were negative, more attention de-
creases returns in the future (the interaction terms are significant
negative at the first and third lags). We offer the following inter-
pretation of this evidence. The investors are likely selling the index
in the expectation of the return being low in the future, which re-
sults in a return decline. This is an indication that the market for
large company stocks is dominated by the momentum investors.
At the same time, this result also suggests that the sign of the past
return has an effect on the future index return, and this impact is
related to the level of investor attention. In other words, investor
attention can potentially determine the degree of return predict-
ability based on the sign of lagged returns. For S&P 500 securities
the interaction effect is also significant (at the third lag), but the
significance is lower (10% level). NASDAQ index is not significantly
influenced by the interaction terms. Thus, the effect of investor
attention on a stock index return conditional on the sign of past re-
turn is more likely among securities of larger companies.
Bond index returns are not influenced by the above interaction
effects, while Gold index regressions have a highly significant po-
sitive interaction effect at the second lag. Following the logic out-
lined previously, this result can be interpreted as follows. Negative
29
returns on Gold in the preceding two weeks are taken by the mar-
ket as an indication that the returns are likely to reverse, i.e., start
rising. This creates a buying pressure and results in an increase of
the return on Gold. The increase in the return depends on how
much attention was devoted to the index. Therefore, investors ap-
pear to be contrarian with respect to the past returns in the Gold
market. Oil index has a marginally significant impact of the inter-
action term at the first and third lags. The immediate impact of
attention on Oil returns conditional on the sign of past return is
negative, meaning negative Oil returns are interpreted by the mar-
ket as an indication that the returns are likely to stay on the
current trend. The conditional impact of attention on Oil return
is positive, suggesting that more attention from investors results
in a higher current return if the returns were negative in the past.
In other words, investors expect Oil return to reverse in about
three weeks. Similar to stocks, the impact of the sign of past return
on the current return for Oil and Gold depends on the level of
investor attention. Including macroeconomic variables as controls
does not substantially change these results.
Next, we consider how changes in lagged returns (rather than
the sign of lagged returns) impact the magnitude of attention ef-
fect. Within this framework, we will also be able to trace more pre-
cisely the effect of investor attention on the relationship between
ð4Þ
past and current returns, i.e., the degree of return predictability.
In this analysis, we adopt a regression model that includes the
interaction terms between past return and attention:
X
4 X
4 X
4
Rit ¼ wi þ ail Ritl þ bil Sitl þ cil Sitl  Rit1 þ eit : ð5Þ
l¼1 l¼1 l¼1
In the above specification, the coefficients on the interaction terms
(c) measure the increase/decrease in the effect of attention on the
index return conditional on a unit increase in the past index return.
These coefficients also measure the change in the impact of the past
returns on the current index return per unit increase in investor
attention. Coefficient a measures the impact of the past returns
on the current index return when there is no change in attention.
ða þ cÞ measures the impact of the lagged return on the current re-
turn conditional on a unit increase in investor attention in the past
(the degree of return predictability).
The results of the above regressions are summarized in Table 7,
which is organized similar to the preceding table. The interaction
terms are significant for four out of six indexes. All three stock in-
dexes experience an impact of investor attention conditional on
the changes in past returns. For both Dow and S&P 500, increasing
returns three weeks prior lead to a significant decrease in (or neg-
ative) impact of attention on returns. In other words, more atten-
tion results in a substantially lower index return. This could be a
sign of contrarian investors present on the market for large and
medium company stocks. For small stocks (NASDAQ), on the other
hand, a rising return in the previous two weeks will significantly
increase the impact of attention. Therefore, more attention results
in a higher return, suggesting the presence of momentum investors
that expect an increasing return when returns were rising in the
past. In either case, attention significantly alters the relationship
between past and current stock index returns, as previously
observed.
Note that the sign of a significant interaction effect at a given
lag (coefficient c) typically corresponds to the opposite sign on
the coefficient of past return at the same lag (a). Since ða þ cÞ
determines predictability of returns given the past change in atten-
tion, more attention is likely to lead to a weaker connection be-
tween past and current return (ða þ cÞ is close to zero). In other
words, when more attention is devoted to a stock index, index re-
turns are less predictable based on their past values, i.e., the mar-
ket is more efficient. This evidence supports the hypothesis that
 30
Table 6
The effect of investor attention on index return conditional on the sign of past return.

Dow S&P 500 NASDAQ Bonds Gold WTIoil

Intercept 5.8  104 1.3  103 1.6  103 3.6  103 4.7  103 4.7  103 2.5  103 5.2  103 4.6  103 4.9  103 9.0  103 3.2  103
(1.7  103) (2.5  103) (5.0  103) (5.3  103) (2.6  103)⁄ (3.4  103) (1.0  102) (1.1  102) (2.7  103)⁄ (7.1  103) (2.8  103)⁄⁄⁄ (4.7  103)
Rt1 0.244 0.245 0.106 0.104 0.064 0.069 0.148 0.157 0.019 0.051 0.252 0.269
(0.074)⁄⁄⁄ (0.075)⁄⁄⁄ (0.067) (0.067) (0.069) (0.070) (0.070)⁄⁄ (0.070)⁄⁄ (0.074) (0.075) (0.071)⁄⁄⁄ (0.071)⁄⁄⁄
Rt2 0.043 0.045 0.053 0.059 0.023 0.021 0.090 0.086 0.099 0.066 0.018 0.038
(0.074) (0.075) (0.067) (0.067) (0.069) (0.069) (0.070) (0.070) (0.073) (0.075) (0.072) (0.073)
Rt3 0.253 0.249 0.200 0.194 0.111 0.110 0.016 0.018 0.026 0.002 0.140 0.131
(0.074)⁄⁄⁄ (0.075)⁄⁄⁄ (0.067)⁄⁄⁄ (0.067)⁄⁄⁄ (0.069) (0.069) (0.070) (0.070) (0.073) (0.074) (0.072)⁄ (0.072)⁄
Rt4 0.036 0.027 0.004 0.005 0.022 0.021 0.057 0.065 0.038 0.016 0.096 0.087
(0.072) (0.073) (0.067) (0.067) (0.069) (0.069) (0.069) (0.070) (0.073) (0.073) (0.071) (0.070)
St1 3.7  103 3.4  103 3.0  103 2.5  103 3.1  103 3.0  103 6.9  104 8.3  104 9.6  104 1.3  103 1.7  103 2.3  103

N. Vozlyublennaia / Journal of Banking & Finance 41 (2014) 17–35

(1.3  103)⁄⁄⁄ (1.4  103)⁄⁄⁄ (1.8  103)⁄ (1.8  103) (1.8  103)⁄ (1.8  103) (2.2  103) (2.3  103) (3.4  103) (3.4  103) (2.6  103) (2.6  103)
St2 6.9  104 5.7  104 2.1  103 1.8  103 1.8  103 1.8  103 1.7  103 1.6  103 4.8  103 4.9  103 9.3  104 1.2  103
(1.6  103) (1.7  103) (2.0  103) (2.0  103) (2.3  103) (2.3  103) (2.5  103) (2.6  103) (4.4  103) (4.4  103) (3.5  103) (3.5  103)
St3 8.4  104 9.7  104 1.9  103 2.2  103 2.0  103 1.9  103 4.0  103 4.2  103 3.2  103 3.6  103 1.9  103 1.7  103
(1.6  103) (1.7  103) (2.0  103) (2.0  103) (2.3  103) (2.3  103) (2.5  103) (2.6  103)⁄ (4.4  103) (4.4  103) (3.6  103) (3.6  103)
St4 3.7  103 4.2  103 3.7  103 4.3  103 1.3  103 1.1  103 2.0  103 1.7  103 6.5  103 5.7  103 2.7  103 4.3  103
(1.4  103)⁄⁄⁄ (1.4  103)⁄⁄⁄ (1.7  103)⁄⁄ (1.8  103)⁄⁄ (1.8  103) (1.8  103) (2.3  103) (2.3  103) (3.5  103)⁄ (3.5  103) (2.7  103) (2.7  103)
St1  D (Rt1 < 0) 5.9  104 5.9  104 4.5  105 2.5  105 1.7  105 2.6  105 2.6  104 3.0  104 3.4  104 2.4  104 1.0  103 1.1  103
(3.0  104)⁄⁄ (3.0  104)⁄⁄ (2.0  104) (2.0  104) (2.7  104) (2.7  104) (3.2  104) (3.2  104) (5.3  104) (5.4  104) (6.0  104)⁄ (6.0  104)⁄
St2  D (Rt2 < 0) 4.1  104 4.2  104 2.4  104 2.6  104 2.0  105 3.1  105 1.9  104 2.2  104 1.4  103 1.3  103 5.0  104 4.0  104
(3.0  104) (3.0  104) (2.0  104) (2.0  104) (2.7  104) (2.7  104) (3.2  104) (3.2  104) (5.2  104)⁄⁄⁄ (5.3  104)⁄⁄ (6.0  104) (6.0  104)
St3  D (Rt3 < 0) 5.0  104 4.8  104 3.8  104 3.6  104 2.3  104 2.2  104 1.2  104 1.5  104 2.2  104 1.4  104 1.1  103 1.1  103
(2.9  104)⁄ (3.0  104) (2.0  104)⁄ (2.0  104)⁄ (2.7  104) (2.7  104) (3.2  104) (3.2  104) (5.3  104) (5.3  104) (6.0  104)⁄ (6.0  104)⁄
St4  D (Rt4 < 0) 1.5  104 1.7  104 1.2  104 1.5  104 2.7  104 2.6  104 2.1  105 2.6  105 5.3  104 4.4  104 2.8  104 2.8  104
(2.9  104) (3.0  104) (2.0  104) (2.0  104) (2.7  104) (2.7  104) (3.2  104) (3.2  104) (5.3  104) (5.3  104) (6.0  104) (6.0  104)
AGGDIV 0.139 0.186 0.581 0.727 1.207 0.643
(0.452) (0.498) (0.545) (0.821) (0.981) (1.027)
DEFSP 5.6  104 3.7  104 5.7  105 4.7  105 1.7  103 2.6  103
(5.3  104) (4.2  104) (4.2  104) (6.1  104) (8.3  104)⁄⁄ (1.1  103)⁄⁄
TERMSP 5.0  104 7.0  104 9.9  105 9.0  104 1.3  104 1.6  103
(4.5  104) (5.1  104) (5.6  104) (7.4  104) (9.6  104) (9.9  104)
RF 4.16  104 6.72  104 6.28  105 7.05  104 2.46  105 0.001616
(3.5  104) (4.5  104) (5.3  104) (5.9  104) (8.7  104) (8.4  104)⁄

R2 0.080 0.084 0.054 0.058 0.033 0.036 0.042 0.046 0.041 0.058 0.064 0.080

This table reports estimation results for the effect of Google search probability (St ) on index return (Rt ) conditional on the sign of past return. The regressions include interaction terms between lagged search probability and a
dummy variable, which is equal to 1 if the lagged return is negative (D (Rti < 0)), and 0 otherwise. The indexes include Dow Jones Industrial Average (Dow), S&P 500 index, NASDAQ, 10 year Treasury bond index (Bonds), Chicago
Board Options Exchange Gold (Gold), and West Texas Intermediate crude oil (WTIoil) in the appropriate columns. The data on index returns and Google search probabilities is obtained at weekly frequency for January 2004–
December 2012. The macroeconomic control variables are: default spread (DEFSP), term spread (TERMSP), one-year Treasury Bill rate (RF) and aggregate dividend yield (AGGDIV). Estimated coefficients are followed by the
standard errors in parenthesis.
⁄
Coefficient significance level at 10%.
⁄⁄
Coefficient significance level at 5%.
⁄⁄⁄
Coefficient significance level at 1%.
Table 7
The effect of investor attention on index return conditional on past return.

Dow S&P 500 NASDAQ Bonds Gold WTIoil

Intercept 6.5  104 1.2  103 4.9  104 2.6  103 4.9  103 4.7  103 3.7  104 1.6  103 4.4  103 8.0  103 8.9  103 2.4  103
(1.7  103) (2.5  103) (5.0  103) (5.4  103) (2.6  103)⁄ (3.4  103) (9.9  103) (1.1  102) (2.8  103) (6.9  103) (2.7  103)⁄⁄⁄ (4.6  103)
Rt1 0.121 0.147 0.509 0.485 0.054 0.038 1.199 1.234 0.065 0.045 0.425 0.342
(0.190) (0.192) (0.492) (0.496) (0.351) (0.355) (0.852) (0.856) (0.268) (0.266) (0.200)⁄⁄ (0.202)⁄
Rt2 0.205 0.216 0.157 0.159 0.693 0.661 0.026 0.011 0.067 0.062 0.110 0.201
(0.189) (0.190) (0.488) (0.492) (0.354)⁄⁄ (0.358)⁄ (0.864) (0.872) (0.268) (0.267) (0.204) (0.206)
Rt3 0.402 0.386 1.519 1.510 0.382 0.407 0.546 0.505 0.214 0.218 0.102 0.002
(0.190)⁄⁄ (0.191)⁄⁄ (0.488)⁄⁄⁄ (0.492)⁄⁄⁄ (0.355) (0.359) (0.859) (0.866) (0.266) (0.265) (0.203) (0.206)
Rt4 0.289 0.316 0.560 0.596 0.106 0.075 0.806 0.875 0.226 0.232 0.712 0.794
(0.190) (0.193) (0.483) (0.488) (0.352) (0.356) (0.834) (0.839) (0.267) (0.267) (0.202)⁄⁄⁄ (0.204)⁄⁄⁄
St1 3.0  103 2.6  103 3.1  103 2.6  103 2.7  103 2.6  103 6.0  104 6.6  104 8.1  104 1.1  103 2.6  103 3.2  103

N. Vozlyublennaia / Journal of Banking & Finance 41 (2014) 17–35

(1.4  103)⁄⁄ (1.4  103)⁄ (1.8  103) (1.8  103) (1.8  103) (1.8  103) (2.2  103) (2.2  103) (3.5  103) (3.5  103) (2.6  103) (2.6  103)
St2 1.3  103 1.2  103 2.1  103 1.9  103 2.1  103 2.2  103 1.1  103 1.0  103 4.2  103 4.5  103 9.1  104 1.3  103
(1.7  103) (1.7  103) (2.0  103) (2.0  103) (2.2  103) (2.2  103) (2.5  103) (2.5  103) (4.5  103) (4.4  103) (3.4  103) (3.4  103)
St3 2.7  104 4.3  104 9.4  104 1.2  103 2.1  103 2.0  103 3.9  103 4.1  103 4.3  103 4.9  103 4.9  103 4.6  103
(1.7  103) (1.7  103) (2.0  103) (2.0  103) (2.2  103) (2.2  103) (2.5  103) (2.5  103) (4.5  103) (4.4  103) (3.4  103) (3.4  103)
St4 3.9  103 4.4  103 4.5  103 5.1  103 1.2  103 1.1  103 2.1  103 1.8  103 8.2  103 6.8  103 4.2  103 6.0  103
(1.4  103)⁄⁄⁄ (1.5  103)⁄⁄⁄ (1.7  103)⁄⁄ (1.8  103)⁄⁄⁄ (1.8  103) (1.8  103) (2.3  103) (2.3  103) (3.5  103)⁄⁄ (3.5  103)⁄ (2.6  103)⁄ (2.6  103)⁄⁄
St1  Rt1 0.002 0.010 0.154 0.149 2.3  104 0.006 0.280 0.289 0.034 0.036 0.178 0.156
(0.062) (0.062) (0.128) (0.129) (0.112) (0.113) (0.218) (0.219) (0.082) (0.082) (0.060)⁄⁄⁄ (0.061)⁄⁄
St2  Rt2 0.059 0.062 0.039 0.040 0.229 0.217 0.022 0.032 0.035 0.041 0.011 0.036
(0.061) (0.061) (0.126) (0.127) (0.113)⁄⁄ (0.114)⁄ (0.221) (0.223) (0.082) (0.082) (0.062) (0.062)
St3  Rt3 0.185 0.179 0.423 0.420 0.147 0.156 0.133 0.122 0.066 0.061 0.008 0.020
(0.061)⁄⁄⁄ (0.061)⁄⁄⁄ (0.126)⁄⁄⁄ (0.127)⁄⁄⁄ (0.113) (0.114) (0.220) (0.221) (0.082) (0.081) (0.061) (0.062)
St4  Rt4 0.078 0.089 0.141 0.151 0.026 0.016 0.220 0.240 0.074 0.081 0.236 0.259
(0.061) (0.062) (0.125) (0.127) (0.112) (0.114) (0.213) (0.215) (0.082) (0.082) (0.061)⁄⁄⁄ (0.061)⁄⁄⁄
AGGDIV 0.155 0.112 0.560 0.572 1.077 0.502
(0.451) (0.493) (0.547) (0.813) (0.986) (1.012)
DEFSP 5.9  104 4.4  104 3.1  105 5.4  105 2.0  103 3.0  103
(5.3  104) (4.2  104) (4.3  104) (6.1  104) (8.2  104)⁄⁄ (1.1  103)⁄⁄⁄
TERMSP 5.2  104 6.6  104 9.1  105 9.2  104 5.3  104 1.7  103
(4.5  104) (5.0  104) (5.5  104) (7.4  104) (9.4  104) (9.8  104)⁄
RF 4.2  104 6.3  104 6.5  105 6.8  104 4.4  104 1.8  103
(3.5  104) (4.4  104) (5.2  104) (5.9  104) (8.5  104) (8.4  104)⁄⁄

R2 0.091 0.095 0.077 0.081 0.041 0.044 0.046 0.050 0.026 0.048 0.097 0.116

This table reports estimation results for the effect of Google search probability (St ) on index return (Rt ) conditional on past return (Rl ). The regressions include interaction terms between lagged search probability and lagged
return. The indexes include Dow Jones Industrial Average (Dow), S&P 500 index, NASDAQ, 10 year Treasury bond index (Bonds), Chicago Board Options Exchange Gold (Gold), and West Texas Intermediate crude oil (WTIoil) in the
appropriate columns. The data on index returns and Google search probabilities is obtained at weekly frequency for January 2004–December 2012. The macroeconomic control variables are: default spread (DEFSP), term spread
(TERMSP), one-year Treasury Bill rate (RF) and aggregate dividend yield (AGGDIV). Estimated coefficients are followed by the standard errors in parenthesis.
⁄
Coefficient significance level at 10%.
⁄⁄
Coefficient significance level at 5%.
⁄⁄⁄
Coefficient significance level at 1%.

31
32 N. Vozlyublennaia / Journal of Banking & Finance 41 (2014) 17–35

when more information is processed by the market, the prices and on volatility of an index. In other words, we investigate whether
returns are more efficient – reflect all available information – and past information on increasing/decreasing index returns paired
returns are less predictable. with sufficient investor attention creates more or less volatility
Bonds and Gold indexes are not influenced by the interaction in the markets. Similar to the previous table, we include interaction
terms in this setting, while Oil index has a highly significant inter- terms between lagged returns and attention into the volatility
action effect at the first and fourth lags. We interpret this evidence regressions as follows:
as follows. If returns on Oil were increasing in the immediate past,
investors that paid more attention to this information expect that X
4 X
4 X
4 X
4
V it ¼ wi þ dil V itl þ ail Ritl þ bil Sitl þ cil Sitl  Rit1 þ eit ;
this trend will be reversed. If the returns were increasing in a dis- l¼1 l¼1 l¼1 l¼1
tant past, though, attentive investors expect that the returns will
ð6Þ
continue rising in the Oil market. Investor attention in either case
significantly determines the connection between the past and where V it is volatility of index i in month t. The coefficients on the
present returns. Similar to stocks, the sign of the interaction effects interaction terms (c) measure the effect of attention on volatility
in the Oil market is opposite to the sign of the coefficient on the conditional on the past changes in returns as well as the effect of
past return at the same lag. As before, this suggests that more past returns on volatility of an index conditional on investor atten-
attention to commodities leads to less predictability in Oil returns tion. The regressions are run on monthly data since volatilities are
and a more efficient commodity market. estimated for each month. Table 8 reports the estimation results
We have established that investor attention can impact the ef- and is arranged similar to the previous table.
fect of past returns on the index returns at present. We analyze Five of the six considered indexes experience the hypothesized
next whether attention can also influence the effect of past returns conditional effects (S&P 500 is the only exception). Increasing

Table 8
The effect of investor attention on index volatility conditional on past return.

Dow S&P 500 NASDAQ Bonds Gold WTIoil

Intercept 4.2  104 1.4  103 2.6  104 1.7  103 1.0  104 2.5  103
(5.6  104) (9.9  104) (3.7  104) (1.4  103) (6.5  104) (4.9  104)⁄⁄⁄
V t1 0.472 0.906 0.634 0.542 0.770 0.048
(0.179)⁄⁄⁄ (0.138)⁄⁄⁄ (0.133)⁄⁄⁄ (0.108)⁄⁄⁄ (0.135)⁄⁄⁄ (0.115)
V t2 0.187 0.267 0.006 0.206 0.365 0.132
(0.188) (0.169) (0.153) (0.118)⁄ (0.171)⁄⁄ (0.111)
V t3 0.089 0.069 0.047 0.060 0.417 0.317
(0.185) (0.178) (0.156) (0.117) (0.173)⁄⁄ (0.084)⁄⁄⁄
V t4 8.3  103 5.7  104 1.9  102 1.2  103 6.2  102 3.4  103
(1.5  101) (1.2  101) (1.2  101) (9.7  102) (1.3  101) (9.1  102)
St1 2.4  104 9.0  105 1.8  104 1.2  104 9.3  104 3.5  104
(1.1  104)⁄⁄ (1.5  104) (1.2  104) (1.4  104) (3.3  104)⁄⁄⁄ (1.3  104)⁄⁄⁄
St2 1.2  104 2.0  104 2.0  104 1.2  104 7.1E-06 2.1  104
(1.0  104) (1.3  104) (1.2  104)⁄ (1.4  104) (3.6  104) (1.4  104)
St3 6.1  105 2.2  105 3.0  105 1.2  105 8.5  104 4.1  105
(1.1  104) (1.3  104) (1.2  104) (1.3  104) (3.6  104)⁄⁄ (1.3  104)
St4 4.3  105 6.6  106 4.2  105 6.1  105 6.0  105 9.8  105
(1.2  104) (1.5  104) (1.2  104) (1.3  104) (3.5  104) (1.3  104)
Rt1 0.205 0.010 0.253 0.035 0.267 0.185
(0.107)⁄ (0.250) (0.132)⁄ (0.167) (0.135)⁄⁄ (0.056)⁄⁄⁄
Rt2 0.070 0.343 0.178 0.152 0.041 0.339
(0.107) (0.266) (0.132) (0.166) (0.146) (0.063)⁄⁄⁄
Rt3 0.034 0.003 0.005 0.386 0.005 0.063
(0.106) (0.260) (0.135) (0.170)⁄⁄ (0.145) (0.073)
Rt4 0.239 0.199 0.062 0.425 0.176 0.071
(0.104)⁄⁄ (0.265) (0.133) (0.173)⁄⁄ (0.137) (0.077)
St1  Rt1 0.057 0.004 0.061 0.002 0.069 0.046
(0.026)⁄⁄ (0.049) (0.029)⁄⁄ (0.031) (0.030)⁄⁄ (0.013)⁄⁄⁄
St2  Rt2 0.017 0.067 0.039 0.029 0.001 0.084
(0.026) (0.052) (0.030) (0.031) (0.033) (0.014)⁄⁄⁄
St3  Rt3 0.003 0.005 0.001 0.076 0.009 0.012
(0.025) (0.050) (0.030) (0.031)⁄⁄ (0.033) (0.017)
St4  Rt4 0.050 0.035 0.019 0.079 0.038 0.019
(0.025)⁄⁄ (0.051) (0.030) (0.032)⁄⁄ (0.030) (0.018)

R2 0.665 0.669 0.623 0.783 0.693 0.864

This table reports estimation results for the effect of Google search probability (St ) on index volatility (V t ) conditional on past return (Rtl ). The regressions include interaction
terms between lagged search probability and lagged return. The indexes include Dow Jones Industrial Average (Dow), S&P 500 index, NASDAQ, 10 year Treasury bond index
(Bonds), Chicago Board Options Exchange Gold (Gold), and West Texas Intermediate crude oil (WTIoil) in the appropriate columns. The data on index returns and Google
search probabilities is obtained at monthly frequency for January 2004–December 2012. Estimated coefficients are followed by the standard errors in parenthesis.
⁄
Coefficient significance level at 10%.
⁄⁄
Coefficient significance level at 5%.
⁄⁄⁄
Coefficient significance level at 1%.
 N. Vozlyublennaia / Journal of Banking & Finance 41 (2014) 17–35 33

Table 9
Attention and cross autocorrelations among indexes.

RIND¼NASDAQ
t RDOW
t RIND¼BOND
t RDOW
t RIND¼GOLD
t RDOW
t RIND¼OIL
t RDOW
t
3 3 3 3 3 4 3
Intercept 5.4  10 4.0  10 1.2  10 1.2  10 1.9  10 3.0  10 5.7  10 1.6  103
(3.5  103) (3.0  103) (1.0  102) (5.7  103) (3.9  103) (1.8  103) (4.1  103) (1.8  103)

RIND
t1
0.457 0.534 1.311 0.114 0.089 0.337 0.457 0.053
(0.455) (0.386) (0.879) (0.498) (0.274) (0.124)⁄⁄⁄ (0.209)⁄⁄ (0.092)

RIND
t2
0.375 0.385 0.411 0.843 0.172 0.302 0.124 0.063
(0.462) (0.392) (0.873) (0.495) (0.279) (0.126)⁄⁄ (0.216) (0.095)

RIND
t3
0.489 0.249 0.502 0.223 0.164 0.115 0.148 0.075
(0.461) (0.391) (0.865) (0.491) (0.274) (0.124) (0.213) (0.094)

RIND
t4
0.151 0.292 0.699 1.164 0.014 0.065 0.844 0.144
(0.457) (0.388) (0.842) (0.478)⁄⁄ (0.274) (0.124) (0.210)⁄⁄⁄ (0.093)

RDOW 0.332 0.110 0.245 0.048 0.591 0.125 1.154 0.136

t1
(0.312) (0.265) (0.357) (0.202) (0.428) (0.193) (0.443)⁄⁄⁄ (0.195)

RDOW 0.168 0.017 0.573 0.180 1.297 0.198 0.546 0.351

t2
(0.312) (0.265) (0.354) (0.201) (0.427)⁄⁄⁄ (0.193) (0.446) (0.197)⁄

RDOW 0.546 0.538 0.203 0.424 0.298 0.330 0.824 0.396

t3
(0.312)⁄ (0.265)⁄⁄ (0.357) (0.202)⁄⁄ (0.435) (0.197)⁄ (0.457)⁄ (0.202)⁄⁄

RDOW 0.275 0.194 0.333 0.174 0.315 0.513 0.063 0.287

t4
(0.311) (0.263) (0.360) (0.204) (0.432) (0.195)⁄⁄⁄ (0.452) (0.199)

SIND 4.8  104 1.1  103 3.3  104 8.7  104 2.0  103 1.3  103 1.4  103 2.6  103
t1
(2.0  103) (1.7  103) (2.3  103) (1.3  103) (3.8  103) (1.7  103) (2.7  103) (1.2  103)⁄⁄
3 4 4 4 4 4 4
SIND 1.3  10 4.8  10 6.0  10 8.9  10 9.9  10 3.9  10 1.2  10 2.2  103
t2
(2.5  103) (2.1  103) (2.6  103) (1.5  103) (4.7  103) (2.1  103) (3.7  103) (1.6  103)

SIND 1.2  103 6.6  104 2.7  103 4.3  104 1.1  102 5.0  103 3.9  103 1.1  103
t3
(2.5  103) (2.1  103) (2.6  103) (1.5  103) (4.7  103)⁄⁄ (2.1  103)⁄⁄ (3.7  103) (1.6  103)

SIND 1.1  103 2.2  104 8.3  104 1.1  103 7.5  103 3.8  103 5.2  103 2.9  103
t4
3 3 3 3 3 ⁄⁄ 3 ⁄⁄ 3 ⁄
(2.0  10 ) (1.7  10 ) (2.4  10 ) (1.3  10 ) (3.8  10 ) (1.7  10 ) (2.8  10 ) (1.2  103)⁄⁄
3 3 3 3 3 3 3
SDOW 4.1  10 2.7  10 2.9  10 3.4  10 3.6  10 3.8  10 2.7  10 3.0  103
t1
(1.9  103)⁄⁄ (1.6  103)⁄ (2.5  103) (1.4  103)⁄⁄ (3.3  103) (1.5  103)⁄⁄ (3.3  103) (1.5  103)⁄⁄

SDOW 1.7  103 1.4  103 2.3  104 1.4  103 3.3  103 4.2  104 5.4  104 7.8  104
t2
(2.2  103) (1.9  103) (3.0  103) (1.7  103) (3.9  103) (1.8  103) (4.0  103) (1.8  103)
3 5 3 4 2 3 3
SDOW 2.2  10 5.5  10 4.2  10 8.5  10 1.1  10 2.6  10 1.6  10 4.0  104
t3
(2.2  103) (1.9  103) (3.1  103) (1.7  103) (4.0  103)⁄⁄⁄ (1.8  103) (4.0  103) (1.8  103)
3 3 3 3 4 3 3
SDOW 3.7  10 4.0  10 3.5  10 3.5  10 1.2  10 2.0  10 6.1  10 5.3  103
t4
(1.9  103)⁄⁄ (1.6  103)⁄⁄⁄ (2.5  103) (1.4  103)⁄⁄ (3.4  103) (1.5  103) (3.3  103)⁄ (1.5  103)⁄⁄⁄

RDOW DOW 0.115 0.070 4.7  105 0.016 0.159 0.004 0.360 0.010
t1  St1
(0.093) (0.079) (0.112) (0.064) (0.141) (0.064) (0.146)⁄⁄ (0.064)

RDOW DOW 0.066 0.007 0.202 0.052 0.443 0.080 0.233 0.116
t2  St2
(0.093) (0.079) (0.111)⁄ (0.063) (0.139)⁄⁄⁄ (0.063) (0.146) (0.064)⁄
DOW
RDOW
t3  St3
0.249 0.229 0.088 0.195 0.117 0.163 0.312 0.184
(0.093)⁄⁄⁄ (0.079)⁄⁄⁄ (0.112) (0.063)⁄⁄⁄ (0.141) (0.064)⁄⁄ (0.149)⁄⁄ (0.066)⁄⁄⁄

RDOW DOW 0.046 0.041 0.073 0.058 0.088 0.161 0.008 0.079
t4  St4
(0.093) (0.079) (0.113) (0.064) (0.140) (0.064)⁄⁄ (0.148) (0.065)
IND 0.122 0.165 0.324 0.022 0.109 0.012
RIND
t1  St1
0.043 0.191
(0.144) (0.122) (0.224) (0.127) (0.085) (0.038)⁄⁄⁄ (0.065)⁄⁄⁄ (0.028)

RIND
t2  SIND
t2
0.100 0.102 0.080 0.222 0.075 0.118 0.004 0.038
(0.147) (0.125) (0.223) (0.126)⁄ (0.087) (0.039)⁄⁄⁄ (0.067) (0.030)
IND 0.175 0.077 0.059 0.043 0.075 0.021
RIND
t3  St3
0.126 0.035
(0.146) (0.124) (0.221) (0.125) (0.085) (0.038) (0.066) (0.029)
IND 0.074 0.098 0.200 0.284 0.004 0.280 0.041
RIND
t4  St4
0.021
(0.144) (0.122) (0.215) (0.122)⁄⁄ (0.085) (0.039) (0.064)⁄⁄⁄ (0.028)

R 2 0.097 0.104 0.089 0.119 0.098 0.162 0.150 0.147

This table reports estimation results for the VAR regressions for Dow and one of the four indexes (IND ¼ NASDAQ =BOND=GOLD=OIL) in the small stocks/bonds/gold/
commodities categories in the appropriate columns. The models include lagged Google search probability (Stl ), lagged index return (Rtl ), as well as the interaction terms
between the lagged return and search probability. The indexes are: Dow Jones Industrial Average (Dow), S&P 500 index, NASDAQ, 10 year Treasury bond index (Bonds),
Chicago Board Options Exchange Gold (Gold), and West Texas Intermediate crude oil (WTIoil). The data on index returns and Google search probabilities is obtained at weekly
frequency for January 2004–December 2012. Estimated coefficients are followed by the standard errors in parenthesis.
⁄
Coefficient significance level at 10%.
⁄⁄
Coefficient significance level at 5%.
⁄⁄⁄
Coefficient significance level at 1%.
34 N. Vozlyublennaia / Journal of Banking & Finance 41 (2014) 17–35
returns on Dow stocks lead to a significant decrease in the effect of
attention on volatility (or a negative effect of attention) in the
immediate future, but to a significant increase in this effect (or a
positive effect) at a distant future. Therefore, attention increases
market fluctuations if the returns were decreasing (possibly inter-
preted as a negative sign by the market), but calms the market if
the returns were increasing for large stocks in the short run. For
the returns in a distant past, though, this relationship is reversed,
possibly due to the expectations of contrarian trends by investors.
Small company stocks (NASDAQ), Gold, and Oil experience an
interaction effect similar to large stocks at the immediate future.
Additionally, Bonds returns are increased with investor attention
if returns were declining in a distant past. Note that the sign of
the coefficient on the interaction effect is typically opposite to
the sign on the coefficient on the past return at the same lag. This
suggests that the ability of past return of an index to predict its
current volatility is likely to be diminished if more attention is de-
voted by the market participants.
In the remaining set of regressions we analyze the role of
investor attention in index return cross-autocorrelations. Lo and
MacKinlay (1990) report cross-autocorrelations among individual
security returns. In particular, they find that large stock returns
in the past can influence the returns of small stocks at present.
We investigate if this effect is related to the level of investor
attention. In addition to the lag effect of large stocks (Dow) on
small stocks (NASDAQ), we check the effect of Dow returns on
Bonds, Gold, and Oil, and the role of investor attention in these
relationships.
To test this hypothesis, we include the interaction terms
between attention and past returns on Dow into the regressions
for NASDAQ, Gold, Bonds, and Oil indexes. The model for each
index i weekly return is specified as follows:
X
4 X
4 X
4 X
4
Rit ¼ wi þ dil Ritl þ dDowl RDowtl þ bil Sitl þ bDowl SDowtl
l¼1 l¼1 l¼1
X
4 X
4 current return since the past return (or its sign) reveal the nature
þ cil Sitl  Rit1 þ cDowl SDowtl  RDowt1 þ eit :
l¼1 l¼1
We additionally report the reverse effect, namely, the impact of the
past return on each of the respective four indexes (conditional on
attention) on the return on Dow at present:
X
4 X
4 X
4 Overall, these results support the view that more revealed infor-
RDowt ¼ wDow þ dDowl RDowtl þ dil Ritl þ bDowl SDowtl
l¼1 l¼1 l¼1
X
4 X
4 X
4
þ bil Sitl þ cDowl SDowtl  RDowt1 þ cil Sitl
l¼1 l¼1
 Rit1 þ eDowt :
The results of these regressions are summarized in Table 9, which is
arranged by index in the appropriate columns. According to this
evidence, the impact of the past return of large company stocks
(Dow) on the returns of small company stocks (NASDAQ) depends
on the amount of investor attention devoted to Dow. With more
attention, this effect is substantially reduced or turned into a large
negative impact. A possible interpretation of this evidence is the fol-
lowing. If investors observed increasing returns on large stocks in
the past (three weeks prior), they expect decreasing returns on
small stocks at present anticipating the capital to flow from small
stocks into large company stocks. The reverse effect of past small
stock returns on Dow is insignificant (consistent with the results
in Lo and MacKinlay (1990)). Note that the sign of the coefficient
on the interaction term is opposite to the sign of the coefficient
on lagged Dow return. This suggests that attention decreases pre-
dictability of returns of small company stocks based on the returns
of large company stocks.
Attention also determines the effect of past Dow returns on
Bonds, Gold, and Oil (at various horizons). These interaction terms
are typically positive, meaning, more attention results is a larger
(or positive) effect of past Dow return on the returns of the above
three indexes. If the returns on large stocks were increasing in the
past due to the ‘‘flight to safety’’, returns on Bonds, Gold, and Com-
modities should be expected to increase as well. As previously, the
sign on the interaction terms is opposite to the sign on the past
return of the appropriate lag for these indexes, suggesting that
attention diminishes predictability of index returns from the past
returns of large company stocks. In other words, attention of inves-
tors to the indexes improves market efficiency.
In the opposite direction, only returns on Bonds and Gold have
an impact on Dow conditional on the level of investor attention.
The sign of this effect depends on the considered lag, which could
be due to the fact that investors expect return reversals at a certain
horizon. In all the instances though, the sign of the coefficient on
the interaction term is opposite to the sign on the coefficient on
the corresponding lag of index return. Therefore, attention results
in less predictable returns of Dow from the past returns on Bonds
or Gold index. This, again, can be interpreted as an indication of a
more efficient market.
4. Conclusions
In this study, we attempt to determine empirically whether
active investor attention – as revealed by Google internet search
– matters for the performance and predictability of security in-
dexes in several broad investment categories. We demonstrate that
attention does influence performance of indexes of stocks, bonds,
and commodities. This impact is short-lived in nature. Moreover,
changes in returns can significantly affect attention and this effect
can last long-term. Given these results, we hypothesize that past
l¼1
index returns should matter for the effects of attention on the
ð7Þ of the information obtained by investors. This also means that
attention can alter predictability of index returns. We demonstrate
that investor attention diminishes predictability of index returns
from the information on either their own lagged values or from
the values of a different index. The impact of lagged returns on
index volatility is also weaker if more attention is paid to the index.
mation (due to increased attention) results in a more efficient
market.
l¼1
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