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Asymmetric relationship of investor sentiment with stock return and volatility: evidence from India

Madhumita Chakraborty and Sowmya Subramaniam

Review of Behavioral Finance, 2020, vol. 12, issue 4, 435-454

Abstract: Purpose - The study examines the cross-sectional and asymmetric relationship of investor sentiment with the stock returns and volatility in India. Design/methodology/approach - The investor sentiment is captured using a market-based measure Market Mood Index (MMI) and a survey-based measure Consumer Sentiment Index (CSI). The asymmetric effect of the relationship is examined using quantile causality approach and cross-sectional effect is examined by considering indices such as the BSE Sensex, and the various size indices such as BSE Large cap, BSE Mid cap and BSE Small cap. Findings - The result of the study found that investor sentiment (MMI) cause stock returns at extreme quantiles. Lower sentiment induces fear-induced selling, thereby lowers the returns and high sentiment is followed by lower future returns as market reverts to fundamentals. On the other hand, bullish shifts in sentiment lower the volatility. There exists a positive feedback effect of stock return and volatility in the formation of investor sentiment. Originality/value - The study captures both asymmetric and cross-sectional relationship of investor sentiment and stock market in an emerging economy, India. The study uses a novel data set (i.e.) MMI which captures the sentiment based on market indicators and are widely disseminated to the public.

Keywords: Quantile causality; Asymmetric relationship; Small case market mood index; Consumer sentiment index (search for similar items in EconPapers)
Date: 2020
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