Measuring Sentiment: The Impact on Financial Markets Volatility

Maria Teresa Garcia () and Carolina e Silva Correia de Carvalho

No 2025/0365, Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa

Abstract: This paper provides insights into the impact of sentiment factors on stock market volatility using monthly panel data from Germany, the UK and the US from 2002-2022. The main objective is to understand how the consumer confidence index, the trading volume, the put/call ratio, and the number of IPOs - components of the sentiment index used in this research - affect the volatility of the DAX 40, FTSE 100, and S&P 500 indices, respectively. The results suggest that investor sentiment has an impact on market volatility in all three indices. A higher consumer confidence index correlates with lower volatility, suggesting that positive sentiment stabilizes markets. Conversely, increased trading volume and a higher put/call ratio are associated with increased volatility, reflecting greater market activity and investor uncertainty. In addition, the number of IPOs serves as a sentiment gauge, with increased IPO activity corresponding to a more optimistic market outlook and contributing to lower volatility. Overall, the results underscore the importance of integrating sentiment measures into financial analysis and provide valuable insights for investors and policymakers seeking to understand and manage market fluctuations. This research contributes to the behavioural finance literature by elucidating the complex interplay between investor sentiment and stock market behaviour.

Keywords: sentiment; volatility; stock market. (search for similar items in EconPapers)
JEL-codes: C58 E44 G12 G14 G17 (search for similar items in EconPapers)
Date: 2025-01
New Economics Papers: this item is included in nep-fmk and nep-rmg
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