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

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  • Utku Uygur

    ()

  • Oktay Taş

    ()

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    Abstract

    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. Copyright Springer Science+Business Media Dordrecht 2014

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    File URL: http://hdl.handle.net/10.1007/s11135-013-9827-3
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    Bibliographic Info

    Article provided by Springer in its journal Quality & Quantity.

    Volume (Year): 48 (2014)
    Issue (Month): 3 (May)
    Pages: 1165-1179

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    Handle: RePEc:spr:qualqt:v:48:y:2014:i:3:p:1165-1179

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    Web page: http://www.springer.com/economics/journal/11135

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    Related research

    Keywords: Noise trader theory; Investor sentiment; Conditional volatility; G02; G15;

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