Exploring the dynamics between investor attention and market volatility during the Russia-Ukraine conflict

The Internet is the go-to source of information, thanks to its ease of accessibility worldwide. Recent research shone a light on Google Trends and how search data influences investors' portfolio decisions and the volatility of the financial markets.

Given the gravity of the Russia-Ukraine war and the importance of the commodity and financial markets, Te Whare Wānaka o Aoraki Lincoln University’s Associate Professor Zhaohua Li, Associate Professor Baiding Hu, Dr Yuqian Zhang, and Dr Wanyi Yang from Auckland University of Technology published their research in the International Review of Economics & Finance. The article offers valuable insights for investors by understanding market volatility pre- and post-breakout of the conflict.

The study analysed selected European and US assets across the stock market, the gold market, the energy commodity market, the food commodity market, the currency market, and the bond (interest rate) market.

“Volatility spillover is the term used to describe when assets fluctuate and influence each other, positively or negatively,” explains Associate Professor Li. “We found that stock and currency markets had the most volatility spillovers both pre- and post-invasion showing these two markets are particularly sensitive to geopolitical upheavals.

“Currency is impacted by many factors and reflects the purchasing power of a country. This market fluctuates more than others as it is traded 24 hours a day. It is therefore easy for an investor to track its performance in real-time. This accessibility may be a factor in why people are drawn to currency investments. Another factor may be that during turbulent times, many people understand that a currency reflects a country’s economic health. Gold is popular too as it is known for its stability.”

As global financial markets reflect the uncertainty of events such as war, these conditions attract investors to monitor what is happening intensely. By doing so, this creates the dynamics between market volatility and investor attention.

“The Russia-Ukraine conflict significantly impacted the relationship between the markets and investor attention,” says Associate Professor Hu. “Investors are anxious to understand the implications on their investments, so they follow the news and adjust their portfolios which adds to market volatility.”

As nervous investors narrow their attention to fluctuations in the financial markets, Professor Hu says they often turn to Google and the Internet for up-to-date information to base their decisions.

“The data collected and analysed through Google Trends provided us with unique and real-time insights into the behaviours of investors. Data showed that there was a greater amount of searching for keywords related to the Russia-Ukraine war during the timeframe of our study from February 2021 to February 2023.”

The researchers used Google Trends to collect data based on users’ search queries. As the dominant Internet search provider in most countries, Google regularly accounts for over 80% of online search traffic, regardless of the language. Investor attention was tracked through keyword searches such as crisis, economy, Russia, Ukraine invasion, Russian gas pipelines Volodymyr Zelenskyy and Vladimir Putin. This research sets itself apart from traditional financial studies that rely on lagging indicators such as news reports or market data by using Google Trends to capture live information.

“As the concern about the Russia-Ukraine conflict increased so did Google search volume relating to the war. This meant we could easily see the correlation between investor attention and investment decisions globally,” says Associate Professor Li.

Both Associate Professor Li and Hu said a takeaway from this research for investors is not to ‘put all your eggs in one basket’. By investing in a diversified portfolio, the impact of market volatility may be reduced.

For policymakers, the research found that Google searches were already increasing before the outbreak of war, an indication of an awareness it was impending. To help maintain the stability of financial markets, Professor Li encourages greater transparency and disclosure of information to investors.

“It is important to quickly distribute information and encourage transparency. With greater openness, policymakers can create more stable investment environments by making investors aware of all the information they need to make sound decisions in a timely manner.”

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