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Sentiment changes, stock returns and volatility: evidence from NYSE, AMEX and NASDAQ stocks

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  • Spyros Spyrou

Abstract

Using US stock portfolios that are formed on book-to-market equity (B/M), long term reversals, momentum, and size, a long sample period (1965--2007), and the comprehensive sentiment index of Baker and Wurgler (2006), this article shows that contemporaneous returns of extreme portfolios are significantly related to monthly sentiment changes and tend to be higher during periods of negative sentiment. Stock returns, however, seem to Granger-cause sentiment changes and are more important in predicting sentiment changes than vice versa. In addition, conditional return volatility is significantly affected by lagged volatility rather than sentiment changes.

Suggested Citation

  • Spyros Spyrou, 2012. "Sentiment changes, stock returns and volatility: evidence from NYSE, AMEX and NASDAQ stocks," Applied Financial Economics, Taylor & Francis Journals, vol. 22(19), pages 1631-1646, October.
    • Handle: RePEc:taf:apfiec:v:22:y:2012:i:19:p:1631-1646
    DOI: 10.1080/09603107.2012.671921
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    Cited by:

    1. Riso, Luigi & Vacca, Gianmarco, 2024. "Sentiment dynamics and volatility: A study based on GARCH-MIDAS and machine learning," Finance Research Letters, Elsevier, vol. 62(PB).
    2. Ajeet Jain & Sascha Strobl, 2017. "The effect of volatility persistence on excess returns," Review of Financial Economics, John Wiley & Sons, vol. 32(1), pages 58-63, January.
    3. D. Schneller & S. Heiden & M. Heiden & A. Hamid, 2018. "Home is Where You Know Your Volatility – Local Investor Sentiment and Stock Market Volatility," German Economic Review, Verein für Socialpolitik, vol. 19(2), pages 209-236, May.
    4. Maitra, Debasish & Dash, Saumya Ranjan, 2017. "Sentiment and stock market volatility revisited: A time–frequency domain approach," Journal of Behavioral and Experimental Finance, Elsevier, vol. 15(C), pages 74-91.
    5. Emilios C. C Galariotis & Phil Holmes & Vasileios Kallinterakis & Xiaodong S. Ma, 2014. "Market states, expectations, sentiment and momentum: How naive are investors?," Post-Print hal-00943345, HAL.
    6. Ngoc Bao Vuong & Yoshihisa Suzuki, 2022. "The Moderating Effect of Market-Specific Factors on the Return Predictability of Investor Sentiment," SAGE Open, , vol. 12(3), pages 21582440221, July.
    7. Anand, Abhinav & Basu, Sankarshan & Pathak, Jalaj & Thampy, Ashok, 2021. "The impact of sentiment on emerging stock markets," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 161-177.
    8. Jain, Ajeet & Strobl, Sascha, 2017. "The effect of volatility persistence on excess returns," Review of Financial Economics, Elsevier, vol. 32(C), pages 58-63.
    9. Chung Baek, 2016. "Stock prices, dividends, earnings, and investor sentiment," Review of Quantitative Finance and Accounting, Springer, vol. 47(4), pages 1043-1061, November.

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