Title: Investor sentiment, stock market returns and volatility: evidence from National Stock Exchange of India

Authors: Pramod Kumar Naik; Puja Padhi

Addresses: Department of Economics, Central University of Rajasthan, Bandarsindri 305817, Ajmer, Rajasthan, India ' Department of Humanities and Social Sciences, Indian Institute of Technology Bombay, Mumbai 400076, India

Abstract: This study explores the relationship between investor sentiment and stock return volatility using monthly data from National Stock Exchange (NSE) of India over July 2001 to December 2013 period. Using seven market-related implicit indicators a sentiment index has been constructed with the help of principal component analysis. Then the analysis has been done by employing ordinary least squares methods, vector autoregression, Granger causality and EGARCH-M models. Findings show that sentiment index significantly influences market excess returns. At the first glance it was found that sentiment has negative influence on the conditional volatility. However, when the sentiment index is decomposed into positive sentiment and negative sentiment changes, the study reveals that positive and negative sentiments have asymmetric impacts on excess return volatility. The Granger causality results suggest a bi-directional causality between excess return and investor sentiment at the third lags.

Keywords: investor sentiment; stock market volatility; principal component analysis; PCA; VAR; EGARCH-M; stock market returns; India; ordinary least squares; OLS; vector autoregression; Granger causality; excess return; third lags.

DOI: 10.1504/IJMP.2016.077816

International Journal of Management Practice, 2016 Vol.9 No.3, pp.213 - 237

Received: 18 Apr 2015
Accepted: 08 Oct 2015

Published online: 16 Jul 2016 *

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