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Does investor sentiment predict the asset volatility? Evidence from emerging stock market India

Author

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  • Kumari, Jyoti
  • Mahakud, Jitendra

Abstract

The present study probes the influence of investor sentiment on the predictability of Indian stock market volatility exploiting the non-linear conditional mean–variance framework. We developed a broad based irrational aggregate sentiment index for an emerging market India to examine this issue. We employed ten aggregate market related sentiment proxies to construct sentiment index applicable for emerging stock markets. We used GARCH model and introduced sentiment in the mean framework. To capture the impact of lagged sentiment on stock market volatility and returns spread, we employed VAR-GARCH models. We find significant effect of investor sentiment on the stock market volatility. We also find that past returns and past investor sentiment affect the volatility negatively and positively. The negative investor sentiment influences volatility and supports the proposition that the noise traders’ pessimism makes the markets highly volatile. We suggest investor sentiment captures the volatility asymmetry patterns in the returns.

Suggested Citation

  • Kumari, Jyoti & Mahakud, Jitendra, 2015. "Does investor sentiment predict the asset volatility? Evidence from emerging stock market India," Journal of Behavioral and Experimental Finance, Elsevier, vol. 8(C), pages 25-39.
    • Handle: RePEc:eee:beexfi:v:8:y:2015:i:c:p:25-39
    DOI: 10.1016/j.jbef.2015.10.001
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    More about this item

    Keywords

    Generalized conditional heteroskedasticity (GARCH) models; Irrational investors; Investors sentiment; Noise traders; Stock market volatility; Volatility asymmetry;
    All these keywords.

    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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