Google Trends and Structural Exchange Rate Models for Turkish Lira–US Dollar Exchange Rate

What is it about?

Our research focuses on using Google search phrases and analyzes if exchange rate forecasts using Google Trends outperform traditional exchange rate models. The literature uses ex-post official macro data in exchange rate forecasts but macro data forecasts are not available in real-time. The conventional exchange rate fundamentals such as production, prices, inflation, and employment data are released to the market with a lag and are subject to constant revisions by statistical agencies. In our research, we aim to use internet search activity data via Google Trends to gauge individual macro fundamentals in a timely manner and use these ex-ante measures to make out-of-sample forecast for Turkish Lira- US Dollar monthly exchange rate return series.

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Why is it important?

It is a challenge to come up with a list of queries via Google Trends to capture movements in economics variables. Arbitrary selection of search phrases based on economic intuition cast some doubt about the generalizability of the findings. Our contribution in this paper is to offer a three-step methodology for query selection for macro fundamentals using Google Trends and Google Correlate. Studies that utilize Google Trends data in any area can follow the same methodology to select the search phrases for the subject matter.