Investors' Uncertainty and Stock Market Risk (original) (raw)
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Measuring Risk and Uncertainty in Financial Markets
2016
Author(s): Khanom, Najrin | Advisor(s): Chauvet, Marcelle; Ullah, Aman | Abstract: The theme of this dissertation is the risk and return modeling of financial time series. The dissertation is broadly divided into three chapters; the first chapter focuses on measuring risks and uncertainty in the U.S. stock market; the second on measuring risks of individual financial assets; and the last chapter on predicting stock return. The first chapter studies the movement of the SaP 500 index driven by uncertainty and fear that cannot be explained by economic fundamentals. A new measure of uncertainty is introduced, using the tone of news media coverage on the equity market and the economy; aggregate holding of safe financial assets; and volatility in SaP 500 options trading. Major contributions of this chapter include uncovering a significant non-linear relationship between uncertainty and changes in the business cycle. An increase in uncertainty is found to be associated with drastic but sho...
Numerous empirical studies dating back to have investigated how markets react to the receipt of new information. However, it is only recently that authors have focussed on differentiating between, and learning from, how investors react to good and bad news. In this paper we find that investors swing between being optimistic and being pessimistic in their interpretation of the new information driven by not only the prevailing market uncertainty and sentiment but also by a significant number of firm-specific characteristics. Pessimism prevails when uncertainty is high, sentiment is weak and the information is being disseminated by companies that are lowly-valued, have high risk, are thinly traded and/or are small cap stocks. However, investors swing to being optimistic when one reverses some or all of these factors. The conclusion that we draw is that risk, uncertainty and the attitude of investors combine to determine how the markets react to new information and this flows through to asset valuations.
Stock market volatility, excess returns, and the role of investor sentiment
Journal of Banking & Finance, 2002
Using the Investors' Intelligence sentiment index, we employ a generalized autoregressive conditional heteroscedasticity-in-mean specification to test the impact of noise trader risk on both the formation of conditional volatility and expected return as suggested by De Long et al. [Journal of Political Economy 98 (1990) 703]. Our empirical results show that sentiment is a systematic risk that is priced. Excess returns are contemporaneously positively correlated with shifts in sentiment. Moreover, the magnitude of bullish (bearish) changes in sentiment leads to downward (upward) revisions in volatility and higher (lower) future excess returns.
SSRN Electronic Journal, 2000
We test the predictive ability of investor sentiment on the return and volatility at the aggregate market level in the U.S., four largest European countries and three Asia-Pacific countries. We find that in the U.S., France and Italy periods of high consumer confidence levels are followed by low market returns. In Japan both the level and the change in consumer confidence boost the market return in the next month. Further, shifts in sentiment significantly move conditional volatility in most of the countries, and in Italy such impacts lead to an increase in returns by 4.7% in the next month. Recent research further shows that investor sentiment predicts the cross-section of stock returns. Lemmon and Portniaguina (2006) document that a measure extracted from the indexes composed by the University of Michigan (MS) and Conference Board (CCI) forecasts the returns on small stocks and those stocks with low institutional ownership. Stambaugh, Yu, and Yuan (2011) argue that, comparing to the stocks in the long leg, the stocks in the short leg of the long-short strategies based on 11 anomalies investigate are relatively overpriced when investor sentiment is high. Chung, Hung and Yeh (2012)
Numerous empirical studies dating back to have investigated how markets react to the receipt of new information. However, it is only recently that authors have focussed on differentiating between, and learning from, how investors react to good and bad news. In this paper we find that investors swing between being optimistic and being pessimistic in their interpretation of the new information driven by not only the prevailing market uncertainty and sentiment but also by a significant number of firm-specific characteristics. Pessimism prevails when uncertainty is high, sentiment is weak and the information is being disseminated by companies that are lowly-valued, have high risk, are thinly traded and/or are small cap stocks. However, investors swing to being optimistic when one reverses some or all of these factors. The conclusion that we draw is that risk, uncertainty and the attitude of investors combine to determine how the markets react to new information and this flows through to asset valuations.
Investor Sentiments and Stock Risk and Return: Evidence from Asian Stock Markets
2022
The study aims to investigate the impact of the sentiment of individual investors on the stock volatility and return in Asian countries' stock markets. To further examine the effect of individual investor sentiment; stock return and volatility among Asian countries. The study uses the monthly consumer confidence index as a proxy of investor sentiment in nine Asian countries, published by trading economics. First, Asian countries' microeconomic components were regressed on consumer confidence to identify the impact of microeconomics risk factors on the sentiment of investors. Second, impulse response function (IRFs) is derived from (VAR) estimation. VAR estimation is used to examine the changes in the Asian stock markets affected by individual investors' sentiment. The (IRFs) responses of Asian stock markets return to rational and irrational investor sentiment is significantly positive. The results reveal positive rational investor sentiment tends to increase Asian Stock Market returns. The findings of Asian countries strongly support assumptions of behavioral finance theory. It further suggests that Asian investors are both rational and irrational decision markers. However, our findings do not hold for country-level analysis as decision varies from country to country. For this research monthly data from Asian countries is used from January 2008 to December 2017. This study will help policymakers to maintain the stability of individual investor sentiments and to decrease financial market uncertainty and volatility. Individual investors can use certain strategies like contrarian strategy of investment for the hard-to-value stocks and to find out high risk in the stock market. This study fills a theoretical gap in growing literature on behavioral finance and determines the impact of the sentiment of investors on the stock market return of nine Asian countries.
The Impact of Uncertainty in Macroeconomic Variables on Stock Returns in the USA
Journal of Risk and Financial Management
In this research paper, the impact of macroeconomic uncertainty on stock returns in the United States of America is examined. To measure this macroeconomic uncertainty, a survey of Consensus Economics with data ranging from 1989 until 2019 was employed. The survey consists of monthly forecasts for several macroeconomic variables for multiple countries. Four uncertainty measures were developed, based on the standard deviation, interquartile range, high-minus-low and an AR- and GARCH model. By performing linear regressions, a positive relationship between macroeconomic uncertainty and stock returns was identified for, on average, 13 out of 49 sectors, which is consistent with economic theory. Furthermore, the standard deviation of stock returns was regressed on macroeconomic uncertainty. A positive relationship was found for, on average, 41.7 out of 49 sectors. The results are discussed at a general level, at the level of the macroeconomic variables and at the sector level.
Investors Behavior Under Growing Financial Market Uncertainty
SSRN: Household Finance eJournal, 2021
The author analyzes the statistics of words and phrases related to financial market trading practices in millions of volumes from Google's book collection and available at Google Ngram Viewer. In recent almost 30 years, as the analyzed data shows, the scholars and practitioners' interest in the specific market strategies and technique shifted toward those more automotive, aggressive, speculative, but less dependent on fundamental analysis, information and data processing, and investors' reasoning and research. This shift may indicate the increasing share of unsophisticated investors trying to cover the lack of experience and professional knowledge through extensive use of technology-supported strategies. In a long-run perspective, this may generate the growth of market instability, risks, and uncertainty.
Impact of Financial Market Uncertainty on Market Returns: A Global Analysis
Capital Markets: Asset Pricing & Valuation eJournal, 2020
This paper examines the effect of financial market uncertainty on market returns of different countries of the world. The effect of other macroeconomic factors on the world’s Equity Market Indices was also explored. These factors included Consumer Price Index (CPI), Real Interest Rates (R.IR), Market Capitalization (MCAP), and Gross Domestic Product per capita growth (GDPPCG).For analyzing this relationship, around 40 countries data including developed and developing countries, over the period of 10 years from 2009-2018 which included major ups and downs occurred in the Equity markets of the world. To calculate financial market uncertainty, we followed Chang et al. (2000) methodology, involving cross-sectional absolute standard deviations (CSAD) among individual Countries returns, to define non-linear relations between equity return dispersions and market returns. For analysis, Panel Least Square (PLS) was used. Fixed Effect Model (FEM) is used to check the overall strength of the m...
Investor sentiment and stock return volatility: Evidence from the Johannesburg Stock Exchange
Cogent Economics & Finance, 2019
Volatility is an important component of asset pricing; an increase in volatility on markets can trigger changes in the risk distribution of financial assets. In conventional financial theory, investors are considered to be rational and any changes in relevant risk are assumed to be a result of the movement in fundamental factors. However, herein this study, it is hypothesized that there are movements in risk that are driven by volatility linked to sentiment-driven noise trader activity whose patterns are irreconcilable with changes in fundamental factors. This assertion is tested using a daily sentiment composite index constructed from a set of proxies and Generalised Autoregressive Conditional Heteroscedasticity models on the South African market over a period spanning July 2002 to June 2018. The results show that there is a significant connection between investor sentiment and stock return volatility which shows that beha-vioural finance can significantly explain the behaviour of stock returns on the Johannesburg Stock Exchange. It is, thus, recommended that due to the inadequacies of popular asset pricing models such as the Capital Asset Pricing Model, consideration should be made towards augmenting these asset pricing models with a sentiment risk factor.