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Home is Where You Know Your Volatility – Local Investor Sentiment and Stock Market Volatility

Author

Listed:
  • Schneller D.
  • Heiden S.
  • Hamid A.

    (University of Augsburg, Augsburg, Germany)

  • Heiden M.

    (Union Investment Institutional GmbH, Frankfurt pe Main, Germany)

Abstract

Using a new variable to measure investor sentiment we show that the sentiment of German and European investors matters for return volatility in local stock markets. A flexible empirical similarity (ES) approach is used to emulate the dynamics of the volatility process by a time-varying parameter that is created via the similarity of realized volatility and investor sentiment. Out-of-sample results show that the ES model produces significantly better volatility forecasts than various benchmark models for DAX and EUROSTOXX. Regarding other international markets no significant difference between the forecasts can be observed.

Suggested Citation

  • Schneller D. & Heiden S. & Hamid A. & Heiden M., 2018. "Home is Where You Know Your Volatility – Local Investor Sentiment and Stock Market Volatility," German Economic Review, De Gruyter, vol. 19(2), pages 209-236, May.
    • Handle: RePEc:bpj:germec:v:19:y:2018:i:2:p:209-236
    DOI: 10.1111/geer.12125
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    Cited by:

    1. Jiang, Shangwei & Jin, Xiu, 2021. "Effects of investor sentiment on stock return volatility: A spatio-temporal dynamic panel model," Economic Modelling, Elsevier, vol. 97(C), pages 298-306.
    2. N. Banholzer & S. Heiden & D. Schneller, 2019. "Exploiting investor sentiment for portfolio optimization," Business Research, Springer;German Academic Association for Business Research, vol. 12(2), pages 671-702, December.

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