Effect of investor fear on Australian financial markets

ABSTRACT

We examine the relationship between changes in the level of investor fear (proxied by the ASX 200 implied volatility index) and Australian financial market returns. We document a statistically significant relationship, across asset classes, where returns decline as investor fear increases. Returns are more sensitive to changes in the level of investor fear during the financial crisis of 2008–2009, when investor fear spikes sharply. Taken together, the results confirm that Australian financial market returns are closely related to prevailing levels of investor fear.

KEYWORDS:

• VIX
• investor fear
• financial markets
• financial crisis

JEL CLASSIFICATION:

• G1
• G10
• G15

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ The Chicago Board of Exchange S&P500 implied volatility index (VIX) and Australian Securities Exchange S&P/ASX 200 implied volatility index (A-VIX).

² The sentiment proxies utilized are trading volume as measured by NYSE turnover, the dividend premium, the closed-end fund discount, the number and first-day returns on IPOs and the equity share in new issues.

³ This is calculated by the Reserve Bank of Australia (www.rba.gov.au

⁴ We consider the Bear Sterns collapse of March 2008 and the Lehman Brothers failure of September 2008 as alternate start dates and find that the results are qualitatively similar to those reported here.