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Effect of investor fear on Australian financial markets

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  • Lee A. Smales

Abstract

We examine the relationship between changes in the level of investor fear (proxied by the ASX 200 implied volatility index) and Australian financial market returns. We document a statistically significant relationship, across asset classes, where returns decline as investor fear increases. Returns are more sensitive to changes in the level of investor fear during the financial crisis of 2008–2009, when investor fear spikes sharply. Taken together, the results confirm that Australian financial market returns are closely related to prevailing levels of investor fear.

Suggested Citation

  • Lee A. Smales, 2017. "Effect of investor fear on Australian financial markets," Applied Economics Letters, Taylor & Francis Journals, vol. 24(16), pages 1148-1153, September.
    • Handle: RePEc:taf:apeclt:v:24:y:2017:i:16:p:1148-1153
    DOI: 10.1080/13504851.2016.1259744
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    References listed on IDEAS

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    1. Lee A. Smales & Jardee N. Kininmonth, 2016. "FX Market Returns and Their Relationship to Investor Fear," International Review of Finance, International Review of Finance Ltd., vol. 16(4), pages 659-675, December.
    2. Tsai, I-C., 2014. "Spillover of fear: Evidence from the stock markets of five developed countries," International Review of Financial Analysis, Elsevier, vol. 33(C), pages 281-288.
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    7. Smales, Lee A., 2014. "News sentiment and the investor fear gauge," Finance Research Letters, Elsevier, vol. 11(2), pages 122-130.
    8. Corredor, Pilar & Ferrer, Elena & Santamaria, Rafael, 2013. "Investor sentiment effect in stock markets: Stock characteristics or country-specific factors?," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 572-591.
    9. Lim, Dominic & Durand, Robert B. & Yang, Joey Wenling, 2014. "The microstructure of fear, the Fama–French factors and the global financial crisis of 2007 and 2008," Global Finance Journal, Elsevier, vol. 25(3), pages 169-180.
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