Home is Where You Know Your Volatility – Local Investor Sentiment and Stock Market Volatility

Schneller D., Heiden S., Hamid A. and Heiden M.
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Schneller D.: University of Augsburg,Augsburg, Germany
Heiden S.: University of Augsburg,Augsburg, Germany
Hamid A.: University of Augsburg,Augsburg, Germany
Heiden M.: Union Investment Institutional GmbH,Frankfurt pe Main, Germany
Authors registered in the RePEc Author Service: Moritz Heiden

German Economic Review, 2018, vol. 19, issue 2, 209-236

Abstract: Using a new variable to measure investor sentiment we show that the sentiment of German and European investors matters for return volatility in local stock markets. A flexible empirical similarity (ES) approach is used to emulate the dynamics of the volatility process by a time-varying parameter that is created via the similarity of realized volatility and investor sentiment. Out-of-sample results show that the ES model produces significantly better volatility forecasts than various benchmark models for DAX and EUROSTOXX. Regarding other international markets no significant difference between the forecasts can be observed.

Keywords: Volatility forecasting; investor sentiment; empirical similiarity; local information advantage (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (3)

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DOI: 10.1111/geer.12125

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