Investor Sentiment, Volatility and Stock Return Comovements
32 Pages Posted: 12 Nov 2013
Date Written: October 17, 2013
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: Suggested Citation