Investor Sentiment, Volatility and Stock Return Comovements

32 Pages Posted: 12 Nov 2013

See all articles by Abhijeet Chandra

Abhijeet Chandra

Vinod Gupta School of Management, IIT Kharagpur

M. Thenmozhi

Indian Institute of Technology Madras

Date Written: October 17, 2013

Abstract

We study the stock return comovements from two different perspectives, one being trading behaviour-induced return comovements and the other volatility-induced return comovements. Following Baker and Wurglur (2006), we construct an investor sentiment index and examine whether it has relationship with return comovements induced by investor's trading behaviour and market volatility. We find that a correlated trading behaviour along with investor sentiment significantly determines excess stock returns. Also stocks with high volatility exhibit higher return comovement properties compared to low volatilie stocks. In a cross-sectional framework, we find higher level of market uncertainty characterized by more biased investor sentiment induces highly correlated trading behaviour and thereby generates stronger correlated returns, causing stronger return comovements. The findings from our study imply that irrational and idiosyncratic sentiment of market participants, particularly which of investors, causes significant return comovement.

Keywords: Investor sentiment, Return comovement, Trading behaviour, Volatility. Investor Sentiment, Volatility and Stock Return Comovements

JEL Classification: C12, C22, G02, G12

Suggested Citation

Chandra, Abhijeet and Thenmozhi, M., Investor Sentiment, Volatility and Stock Return Comovements (October 17, 2013). Available at SSRN: https://ssrn.com/abstract=2353073 or http://dx.doi.org/10.2139/ssrn.2353073

Abhijeet Chandra (Contact Author)

Vinod Gupta School of Management, IIT Kharagpur ( email )

Kharagpur, 721302
India

M. Thenmozhi

Indian Institute of Technology Madras ( email )

Sardar Patel Road
Guindy
Chennai, TN Tamil Nadu
India

Register to save articles to
your library

Register

Paper statistics

Downloads
393
Abstract Views
1,185
rank
73,814
PlumX Metrics