Document Type

Article

Publication Date

1-2019

Abstract

We propose a novel approach to model investors' uncertainty using the conditional volatility of investors' sentiment. Working with weekly data on investor sentiment, six major U.S. stock indices, and alternative measures of uncertainty, we run various tests to validate our proposed measure. The estimates show that investors' uncertainty is greater during economic downturns, and it is linked with lower investors' sentiment. In addition, the results support the existence of a positive conditional correlation between sentiment and returns. This positive spillover between sentiment and returns is interpreted as a positive link between investors' uncertainty and market risk. We also find that investors’ uncertainty and market risk are strongly driven by their lagged values. Our measure consistently captures periods of high uncertainty as shown by a positive and highly statistically significant correlation with other existing measures of uncertainty.

Comments

© 2019 Informa UK Limited. Original published version available at https://doi.org/10.1080/15427560.2018.1506787

First Page

304

Last Page

315

Publication Title

Journal of Behavioral Finance

DOI

10.1080/15427560.2018.1506787

Included in

Finance Commons

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