Analysing investor sentiment and stock market volatility of the JSE size-based indices: a GARCH-MIDAS approach

During periods of economic uncertainty, investors often display irrational behaviour that amplifies market volatility. To examine the validity of this growing assertion, this study investigated the Johannesburg Stock Exchange (JSE) from January 2000 to end of December 2023, focusing on how investor sentiment affects market volatility, with consideration of differing effects based on firm size. Utilizing a GARCH-MIDAS framework which allows for the decomposition of volatility into short-run and long-run components, the research examined whether investor sentiment significantly influences stock market volatility in South Africa. The analysis revealed that small- and mid-cap indices are particularly sensitive to shifts in investor sentiment in the short run. In contrast, the long-run volatility of mid-cap stocks is significantly influenced by macroeconomic factors, particularly inflation and exchange rate fluctuations. The findings also demonstrate that firm size has a significant impact on volatility dynamics, highlighting the diverse ways that small-, mid-, and large-cap stocks react to economic and behavioural factors. These results show that the JSE’s volatility patterns are shaped by the size-dependent roles of macroeconomic data and investor sentiment, and contributes to literature by providing novel evidence from a major emerging market, highlighting the importance of firm size in understanding the temporal pattern of volatility and its determinants.