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The Nonlinear Relationship between Investor Sentiment, Stock Return, and Volatility

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  • Gang He
  • Shuzhen Zhu
  • Haifeng Gu

Abstract

Based on the DSSW model, we analyze the nonlinear impact mechanism of investor sentiment on stock return and volatility by adjusting its hypothesis in Chinese stock market. We examine the relationship between investor sentiment, stock return, and volatility by applying OLS regression and quantile regression. Our empirical results show that the effects of investor sentiment on stock market return are asymmetric. There is “Freedman effect” in Chinese stock market, but only optimistic sentiment has a significant nonlinear impact on stock market returns when the stock market is a balanced market or a bear market. Meanwhile, “create the space effect” does exist in Chinese stock market too. It only exists when the market is in equilibrium, and only pessimistic sentiment has the nonlinear effect on stock market volatility.

Suggested Citation

  • Gang He & Shuzhen Zhu & Haifeng Gu, 2020. "The Nonlinear Relationship between Investor Sentiment, Stock Return, and Volatility," Discrete Dynamics in Nature and Society, Hindawi, vol. 2020, pages 1-11, March.
    • Handle: RePEc:hin:jnddns:5454625
    DOI: 10.1155/2020/5454625
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    Cited by:

    1. Phan, Thi Nha Truc & Bertrand, Philippe & Phan, Hong Hai & Vo, Xuan Vinh, 2023. "The role of investor behavior in emerging stock markets: Evidence from Vietnam," The Quarterly Review of Economics and Finance, Elsevier, vol. 87(C), pages 367-376.
    2. Dias, Ishanka K. & Fernando, J.M. Ruwani & Fernando, P. Narada D., 2022. "Does investor sentiment predict bitcoin return and volatility? A quantile regression approach," International Review of Financial Analysis, Elsevier, vol. 84(C).

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