The impacts of investor sentiment on returns and conditional volatility of international stock markets

One of the main arguments of behavioral finance is that some properties of asset prices are most probably regarded as deviations from fundamental value and they are generated by the participation of traders who are not fully rational, thus called noise traders. Noise trader theory postulates that se...

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Bibliographic Details
Published in:Quality & quantity 2014-05, Vol.48 (3), p.1165-1179
Main Authors: Uygur, Utku, Taş, Oktay
Format: Article
Language:English
Subjects:
Analysis
Arbitrage
Behavioral economics
Earnings
Economic theory
Federal Republic of Germany
Finance
Foreign securities
France
Growth stocks
Hong Kong
Hypotheses
Investments
Investor behavior
Investors
Japan
Markets
Methodology of the Social Sciences
Noise
Participation
Prices
Securities markets
Social Sciences
Stochastic models
Stock exchange
Stock exchanges
Stock market indexes
Stock Markets
Stock price indexes
Stock returns
Stocks
Studies
Traders
U.S.A
Values
Volatility
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Summary:One of the main arguments of behavioral finance is that some properties of asset prices are most probably regarded as deviations from fundamental value and they are generated by the participation of traders who are not fully rational, thus called noise traders. Noise trader theory postulates that sentiment traders have greater impact during high-sentiment periods than during low-sentiment periods, and sentiment traders miscalculate the variance of returns undermining the mean-variance relation. The main objective of this research is to construct a model to evaluate the returns and conditional volatility of various stock market indexes considering the changes in the investor sentiment by measuring the effects of noise trader demand shocks on returns and volatility. EGARCH model is used to determine whether earning shocks have more influence on the conditional volatility in high sentiment periods weakening the mean–variance relation. This paper takes an international approach using weekly market index returns of U.S., Japan, Hong Kong, U.K., France, Germany, and Turkey. Weekly trading volumes of these indexes are regressed against a group of macroeconomic variables and the residuals are used as proxies for investor sentiment and significant evidence is found that there is asymmetric volatility in these market indexes and earning shocks have more influence on conditional volatility when the sentiment is high.
ISSN:0033-5177
1573-7845
DOI:10.1007/s11135-013-9827-3