Sentiment Dynamics and Volatility of International Stock Markets

Abstract

This study attempts to analyze the effects of investor sentiment on volatility of nine stock markets, and capture the asymmetry in terms of negative and positive news during the period from January, 2004 to June, 2015. Empirical evidence from a sentiment-augmented TGARCH model demonstrates that there is an asymmetric property for all markets. The estimated coefficient of country-specific consumer confidence index used as a proxy for investor sentiment is statistically significant and negative for France and Germany, but statistically significant and positive for Ireland alone. The results provide evidence that in France and Germany, stock market volatility is sensitive to negative shock in investor sentiment, supporting the existence of the leverage effect; in Ireland, however, no such sensitivity exists. The results of this study should be of a particular interest for both domestic and international investors, academic researchers and policymakers in terms of international portfolio diversification. Investors can potentially improve their portfolio performance by considering investor sentiment, while policymakers can take steps to stabilize investor sentiment, thereby reducing stock market volatility and uncertainty.