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The Impact of Sentiment on Realized Higher-Order Moments in the S&P 500: Evidence from the Fear and Greed Index

Author

Listed:
  • Richard Mawulawoe Ahadzie

    (Tasmanian School of Business and Economics, University of Tasmania, Private Bag 84, Hobart, TAS 7001, Australia)

  • Peterson Owusu Junior

    (School of Construction Economics & Management, Faculty of Engineering & the Built Environment, University of the Witwatersrand, Johannesburg 2000, South Africa)

  • John Kingsley Woode

    (Department of Finance, School of Business, University of Cape Coast, Cape Coast, Ghana)

Abstract

This study empirically investigates the relationship between realized higher-order moments and the Fear and Greed Index as a measure of sentiments. We estimate daily realized moments using 5 min return data of the S&P 500 index from 3 January 2011 to 18 September 2020. We find that the Fear and Greed Index significantly impacts realized volatility during periods of extreme fear. Additionally, various sentiment indicators influence realized skewness and realized kurtosis. The VIX index significantly reduces realized skewness across all sentiment levels. Bearish and bullish sentiments have a significant negative relationship with negative realized skewness during periods of extreme fear and extreme greed. However, the Fear and Greed Index and bearish and bullish sentiments have a significant positive relationship with positive realized skewness. During extreme fear, the Fear and Greed Index and bearish and bullish sentiments have a significant negative relationship with realized kurtosis. These results remain consistent when considering the non-linear characteristics of the Fear and Greed Index during periods of extreme fear and extreme greed. These findings highlight the relevance of understanding sentiment in financial risk management and its significant relationship with the asymmetric and extremity characteristics of asset returns.

Suggested Citation

  • Richard Mawulawoe Ahadzie & Peterson Owusu Junior & John Kingsley Woode, 2024. "The Impact of Sentiment on Realized Higher-Order Moments in the S&P 500: Evidence from the Fear and Greed Index," JRFM, MDPI, vol. 18(1), pages 1-34, December.
    • Handle: RePEc:gam:jjrfmx:v:18:y:2024:i:1:p:2-:d:1551910
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    References listed on IDEAS

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