How does investor sentiment impact stock volatility? New evidence from Shanghai A-shares market

Dejun Xie, Yu Cui and Yujian Liu

China Finance Review International, 2021, vol. 13, issue 1, 102-120

Abstract: Purpose - The focus of the current research is to examine whether mixed-frequency investor sentiment affects stock volatility in the China A-shares stock market. Design/methodology/approach - Mixed-frequency sampling models are employed to find the relationship between stock market volatility and mixed-frequency investor sentiment. Principal analysis and MIDAS-GARCH model are used to calibrate the impact of investor sentiment on the large-horizon components of volatility of Shanghai composite stocks. Findings - The results show that the volatility in Chinese stock market is positively influenced byB–Winvestor sentiment index, when the sentiment index encompasses weighted mixed frequencies with different horizons. In particular, the impact of mixed-frequency investor sentiment is most significantly on the large-horizon components of volatility. Moreover, it is demonstrated that mixed-frequency sampling model has better explanatory powers than exogenous regression models when accounting for the relationship between investor sentiment and stock volatility. Practical implications - Given the various unique features of Chinese stock market and its importance as the major representative of world emerging markets, the findings of the current paper are of particularly scholarly and practical significance by shedding lights to the applicableness GARCH-MIDAS in the focused frontiers. Originality/value - A more accurate and insightful understanding of volatility has always been one of the core scholarly pursuits since the influential structural time series modeling of Engle (1982) and the seminal work of Engle and Rangel (2008) attempting to accommodate macroeconomic factors into volatility models. However, the studies in this regard are so far relatively scarce with mixed conclusions. The current study fills such gaps with improved MIDAS-GARCH approach and new evidence from Shanghai A-share market.

Keywords: Investor sentiment; Market volatility; MIDAS regression model; GARCH-MIDAS model; Mixed-frequency data (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eme:cfripp:cfri-01-2021-0007

DOI: 10.1108/CFRI-01-2021-0007

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