Effects of the first wave of COVID-19 pandemic on implied stock market volatility: International evidence using a google trend measure.

This paper investigates the relationship between investors' attention, as measured by Google search queries, and equity implied volatility during the COVID-19 outbreak. Recent studies show that search investors' behavior data is an extremely abundant repository of predictive data, and investor-limited attention increases when the uncertainty level is high. Our study using data from thirteen countries across the globe during the first wave of the COVID-19 pandemic (January-April 2020) examines whether the search "topic and terms" for the pandemic affect market participants' expectations about future realized volatility. With the panic and uncertainty about COVID-19, our empirical findings show that increased internet searches during the pandemic caused the information to flow into the financial markets at a faster rate and thus resulting in higher implied volatility directly and via the stock return-risk relation. More specifically for the latter, the leverage effect in the VIX becomes stronger as Google search queries intensify. Both the direct and indirect effects on implied volatility, highlight a risk-aversion channel that operates during the pandemic. We also find that these effects are stronger in Europe than in the rest of the world. Moreover, in a panel vector autoregression framework, we show that a positive shock on stock returns may soothe COVID-related Google searches in Europe. Our findings suggest that Google-based attention to COVID-19 leads to elevated risk aversion in stock markets.