Title: The predictive ability of consumer sentiment's volatility to the Malaysian stock market's volatility

Authors: Nathrah Yacob; Nurul Shahnaz Mahdzan

Addresses: Department of Banking and Finance, Faculty of Business and Accountancy, University of Malaya, 50603 Kuala Lumpur, Malaysia ' Department of Banking and Finance, Faculty of Business and Accountancy, University of Malaya, 50603 Kuala Lumpur, Malaysia

Abstract: In this paper, we examine the predictive ability of consumer sentiment volatility on the volatility of stock returns in Malaysia. We also investigate the relationship between volatility of consumer sentiment and volatility of stock market returns with a focus on the 2008 global financial crisis. The consumer sentiment index is derived from a national survey of 1,200 Malaysian households including a measurement of the level of consumers' optimism or pessimism in regards to the economy. Although the surveys measure the general outlook of households in regards to the economy, the present paper provides distinct evidence that the consumer sentiment index is relevant to the Malaysian stock market behaviour. Results show that volatility of consumer sentiment index holds significant predictive power in explaining the behaviour of stock market volatility measured by GARCH (1,1). Findings also provide evidence of significant predictive power of the consumer sentiment volatility to stock market volatility during the 2008 global financial crisis.

Keywords: behavioural finance; emerging markets; investor sentiment; stock returns; Malaysia; consumer sentiment; sentiment volatility; stock market volatility; financial crisis; consumer optimism; consumer pessimism.

DOI: 10.1504/AAJFA.2014.067018

Afro-Asian Journal of Finance and Accounting, 2014 Vol.4 No.4, pp.460 - 476

Available online: 20 Jan 2015 *

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