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Author Arik, Ali
Title Modeling Market Sentiment and Conditional Distribution of Stock Index Returns under GARCH Process
book jacket
Descript 70 p
Note Source: Dissertation Abstracts International, Volume: 72-07, Section: A, page:
Adviser: Paul J. Zak
Thesis (Ph.D.)--The Claremont Graduate University, 2011
In finance, one of the greatest challenges is to measure investor sentiment correctly. A shortcoming of previous studies has been their failure to find an appropriate methodology which would define market sentiment correctly and use stock volatility to measure a direct relationship between sentiment and expected returns. Using survey-based measures of both individual and institutional investor sentiment, along with a set of macroeconomic variables, I employ a generalized autoregressive conditional heteroscedasticity specification, which employs not only the conditional volatility but also implied volatility (VIX) in the mean equation to test the impact of investor sentiment on stock returns. First, I find support for a negative relation between stock returns and implied volatility. Second, I find a positive and statistically significant relationship between changes in the sentiment Bull Ratio of both institutional and individual investors and S&P 500 excess returns in the following month. The estimation results also suggest that the opinions of institutional investors seem to relate to market data better than those of individual investors. In behavioral models, it is believed that investors' widespread optimism and pessimism can cause prices to deviate from their fundamental values, leading to temporary price corrections in the form of mean-reverting behavior when those expectations are not met. Using periodic realized market returns as anchors, I find a positive (negative) insignificant (significant) relationship between daily index returns and bullish (bearish) sentiment. These effects are stronger when the state of implied volatility is controlled as low, moderate, and high state
School code: 0047
Host Item Dissertation Abstracts International 72-07A
Subject Economics, Finance
Alt Author The Claremont Graduate University. School of Politics and Economics
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