The Relationships between Sentiment, Returns and Volatility

34 Pages Posted: 12 May 2004 Last revised: 27 Feb 2019

See all articles by Yaw-Huei Wang

Yaw-Huei Wang

UNSW; National Taiwan University

Aneel Keswani

Faculty of Finance, Cass Business School, City University, London

Stephen J. Taylor

Lancaster University - Department of Accounting and Finance

Date Written: January 1, 2006

Abstract

Previous papers that test whether sentiment is useful for predicting volatility ignore whether lagged returns information might also be useful for this purpose. By doing so, these papers potentially overestimate the role of sentiment in predicting volatility. In this paper we test whether sentiment is useful for volatility forecasting purposes. We find that most of our sentiment measures are caused by returns and volatility rather than vice versa. In addition, we find that lagged returns cause volatility. All sentiment variables have extremely limited forecasting power once returns are included as a forecasting variable.

Keywords: Causality, Investor Surveys, Market based sentiment measures, Realized volatility, Stock index returns

JEL Classification: G12, G14

Suggested Citation

Wang, Yaw-Huei and Keswani, Aneel and Taylor, Stephen J., The Relationships between Sentiment, Returns and Volatility (January 1, 2006). EFMA 2004 Basel Meetings Paper; Cass Business School Research Paper; International Journal of Forecasting, Vol. 21, No. 1, 2006. Available at SSRN: https://ssrn.com/abstract=499502 or http://dx.doi.org/10.2139/ssrn.499502

Yaw-Huei Wang (Contact Author)

UNSW ( email )

Sydney, NSW 2052
Australia

National Taiwan University ( email )

Department and Graduate Institute of Finance
College of Management
Taipei, 106
Taiwan
+886233661092 (Phone)
+886283695581 (Fax)

Aneel Keswani

Faculty of Finance, Cass Business School, City University, London ( email )

106 Bunhill Row
London EC1Y 8TZ
Great Britain
+44 207 040 8763 (Phone)

Stephen J. Taylor

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom
+ 44 15 24 59 36 24 (Phone)
+ 44 15 24 84 73 21 (Fax)

HOME PAGE: http://www.lancs.ac.uk/staff/afasjt

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