INVESTOR SENTIMENTS AND STOCK MARKET VOLATILITY: EVIDENCE FROM INDIA

Authors: Dr. Neeru Gupta.

Abstract:

Noise traders' propensity to emotionally react to market fluctuations, news, rumours, or other non-fundamental factors influences the irrational investor’s financial decisions. This ultimately impacts the stock market return and volatility. To measure the irrational traders’ sentiments, The study suggested the Investor Sentiment Index which is reliable, consistent, and measures the effects on the stock market. The study incorporates daily data as modelling volatility with high-frequency data is more accurate. The GARCH (1.1), GJR-GARCH (1.1), and E-GARCH (1.1) models were used in the study to determine how sentiment affected conditional volatility. The findings supported the presence of the leverage effect and volatility persistence. Hence, investor sentiments play a vital role in financial decisions and impact market volatility. The study supports the behavioural finance model asset pricing theory instead of traditional approaches like the capital asset pricing model wherein the market decisions are based on fundamental information. The study will benefit policymakers and investors.

Tags:

Investor Sentiment Index Indian Stock Market Volatility Return GARCH