Sentiment’s effect on the variance of stock returns

ABSTRACT

This study examines the effect that sentiment has on the conditional variance of stock returns. We find that the effect is asymmetric and differs depending upon the state of the economy. We also examine whether the effect is time-varying. To capture time-varying effects, we use rolling 10-year windows of daily data in a GARCH (1,1) model that allows positive and negative sentiment to have an asymmetric effect on the conditional variance of stock returns. We find that the negative sentiment has a positive effect on the conditional variance but dissipates after 1970.

KEYWORDS:

• Text analysis
• stock market sentiment
• conditional variance
• GARCH
• equity markets

JEL CLASSIFICATION:

• G10
• G4

Disclosure statement

No potential conflict of interest was reported by the authors.