Investor Sentiment and Financial Market Volatility

Shu, Hui-Chu; Chang, Jung-Hsien

doi:10.1080/15427560.2015.1064930

Cited by 55 publications

(32 citation statements)

References 88 publications

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“…When sentiment and expectations reverse, these pricing bubbles burst due to the ensuing mass liquidation of portfolios by the sentiment traders. This process induces volatility in the financial markets (Shu & Chang, 2015).…”

Section: Introductionmentioning

confidence: 99%

Investor sentiment and stock return volatility: Evidence from the Johannesburg Stock Exchange

Rupande

Muguto

Muzindutsi

2019

Cogent Economics & Finance

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Volatility is an important component of asset pricing; an increase in volatility on markets can trigger changes in the risk distribution of financial assets. In conventional financial theory, investors are considered to be rational and any changes in relevant risk are assumed to be a result of the movement in fundamental factors. However, herein this study, it is hypothesized that there are movements in risk that are driven by volatility linked to sentiment-driven noise trader activity whose patterns are irreconcilable with changes in fundamental factors. This assertion is tested using a daily sentiment composite index constructed from a set of proxies and Generalised Autoregressive Conditional Heteroscedasticity models on the South African market over a period spanning July 2002 to June 2018. The results show that there is a significant connection between investor sentiment and stock return volatility which shows that behavioural finance can significantly explain the behaviour of stock returns on the Johannesburg Stock Exchange. It is, thus, recommended that due to the inadequacies of popular asset pricing models such as the Capital Asset Pricing Model, consideration should be made towards augmenting these asset pricing models with a sentiment risk factor.

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Section: Introductionmentioning

confidence: 99%

Investor sentiment and stock return volatility: Evidence from the Johannesburg Stock Exchange

Rupande

Muguto

Muzindutsi

2019

Cogent Economics & Finance

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“…According to psychological theory, emotions refer to a complex psychological state such as happiness, sadness, anger, fear, surprise, and disgust, while sentiment can be regarded as a mental attitude that is created through the existence of the emotion or a thought that has been influenced by emotion [55,74]. Behavioral financial scientists believe that emotions influence investors' judgments and decision-making, and so does sentiment [75]. Although the reasons and mechanisms of the effect of investor sentiment on stock returns are not very clear, researchers agree that the behaviors of investors are influenced by their emotions, cognitive limitations, and biases so that their behaviors cannot be completely rational [75][76][77][78].…”

Section: E Effect Of Investor Sentiment On Stock Returnsmentioning

confidence: 99%

The Influence of Research Reports on Stock Returns: The Mediating Effect of Machine-Learning-Based Investor Sentiment

Wang

2021

Discrete Dynamics in Nature and Society

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This paper investigates whether and how the research reports issued by securities companies affect stock returns from the perspective of investor sentiment in China. By collecting research reports and investor comments from a popular Chinese investor community, i.e., East Money, we derive two indices that represent the information contained in research reports: one is the attention of research reports and the other is the average stock rating given by research reports; then we develop an investor sentiment indicator using the machine learning method. Based on behavioral finance theory, we hypothesize that research reports have a significant effect on stock returns and investor sentiment plays a mediating role in it. The empirical analysis results confirm the above hypotheses. Specifically, the average stock rating given by research reports can better predict future stock returns, and investor sentiment plays a partial mediating role in the relationship between stock rating and stock returns.

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“…Some authors (Maghrebi et al, 2014) have linked the market's volatility to financial instability, and have investigated whether changes in implied volatility in international financial markets can be defined as a function of market sentiment and a realignment process following forecast errors consistent with rational expectations. Shu and Chang (2015) analyzed the interrelationship of investors' sentiments and the finance market's volatility. Baker et al (2012) found evidence that investor sentiment plays a significant role in international market volatility and generates return predictability that is consistent with corrections of overreaction.…”

Section: Theoretical Backgroundmentioning

confidence: 99%

Application of ensemble of recurrent neural networks for forecasting of stock market sentiments

Maknickienė

Lapinskaitė

Maknickas

2018

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Research background: Research and measurement of sentiments, and the integration of methods for sentiment analysis in forecasting models or trading strategies for financial markets are gaining increasing attention at present. The theories that claim it is difficult to predict the individual investor’s decision also claim that individual investors cause market instability due to their irrationality. The existing instability increases the need for scientific research. Purpose of the article: This paper is dedicated to establishing a link between the individual investors’ behavior, which is expressed as sentiments, and the market dynamic, and is evaluated in the stock market. This article hypothesizes that the dynamics in the market is unequivocally related to the individual investor’s sentiments, and that this relationship occurs when the sentiments are expressed strongly and are unlimited. Methods: The research was carried out invoking the method of Evolino RNN-based prediction model. The data for the research from AAII (American Association of Individual Investors), an investor sentiment survey, were used. Stock indices and sentiments are forecasted separately before being combined as a single composition of distributions. Findings & Value added: The novelty of this paper is the prediction of sentiments of individual investors using an Evolino RNN-based prediction model. The results of this paper should be seen not only as the prediction of the connection and composition of investors’ sentiments and stock indices, but also as the research of the dynamic of individual investors’ sentiments and indices.

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Investor Sentiment and Financial Market Volatility

Cited by 55 publications

References 88 publications

Investor sentiment and stock return volatility: Evidence from the Johannesburg Stock Exchange

Investor sentiment and stock return volatility: Evidence from the Johannesburg Stock Exchange

The Influence of Research Reports on Stock Returns: The Mediating Effect of Machine-Learning-Based Investor Sentiment

Application of ensemble of recurrent neural networks for forecasting of stock market sentiments

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