Public reaction to stock market volatility: evidence from the ATUS

ABSTRACT

How does the public react to changes in the stock market? We know from the existing body of research that sentiment can predict future stock-market movements. However, do market movements affect sentiment? This article addresses these questions by testing whether market movements precede changes in the emotional well-being of the general public. Using Granger causality analysis, we compare how market movements affect public well-being during periods of increased (2010) and decreased (2012) volatility. The results show that 30-day-lagged returns are associated positively and significantly with the public’s emotional well-being, and that this effect is stronger during periods of increased volatility. The results also show that this effect may persist for up to 120 days.

KEYWORDS:

• Well-being
• sentiment
• stock market
• investments

JEL CLASSIFICATION:

• D14
• D12
• D80

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Emotional well-being is defined as the difference between the measured positive affect and negative affect. Affect is defined as the emotional condition of a person that is strongly affected by recent events and moods (George 2010).