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Abstract
ABSTRACT Purpose: The purpose of this study was to analyze the effect of investor sentiment on the volatility of the Brazilian stock market. Specifically, it aimed to identify if the asymmetric behavior of sentiment could be observed in emerging markets, considering companies that have characteristics that are difficult to price. Originality/value: Unlike most studies on investor sentiment, this study focuses on its impact on the stock market volatility, as well as on the characteristics of companies associated with difficult pricing. Design/methodology/approach: The volatility of the IBRX100 index was used to represent the Brazilian stock market, and as a proxy for investor sentiment it was selected Miranda's index (2018), based on market data. Data were estimated using the two-stage least squares (MQ2E) technique to address endogeneity problems. Finally, the volatility of companies with difficult-to-price characteristics was segregated to analyze their sensitivity to sentiment. Findings: The results indicate that sentiment has a negative and sig nificant relationship with the volatility of the Brazilian market, as well as evidences an asymmetrical behavior, being statistically stronger in pessimistic periods. Additional analyzes evidence that the explanatory sentiment capacity is sensitive to companies' characteristics, but only companies with a high book-to-market ratio showed asymmetric behavior, as expected by the literature. The portfolios segmented by size and illiquidity maintained an asymmetric behavior, but it was the volatility of the large companies and the less illiquid ones that were best explained by sentiment, indicating that the Brazilian market has distinctive characteristics in relation to developed markets.
Highlights
Understanding market volatility is of fundamental importance to determine the cost of capital and evaluate investment-related decisions (Aydogan, 2017)
In the Brazilian market, Piccoli et al (2018) observed an asymmetric relationship between conditional volatility and asset returns of large companies. This result is not supported by the literature since it was expected that the explanatory capacity of the investor sentiment would be greater when companies have characteristics associated with difficult pricing, in line with the results found by Baker and Wurgler (2006, 2007)
The aim of this study was to deepen the discussions related to the explanatory capacity of investor sentiment in the Brazilian stock market, seeking to confirm its relevance and to verify the existence of asymmetric behaviors caused by variations in sentiment and by companies’ characteristics associated with difficulty pricing
Summary
Understanding market volatility is of fundamental importance to determine the cost of capital and evaluate investment-related decisions (Aydogan, 2017). The sentiment would cause a deviation of the price from its fundamentals and a non-homogeneous interpretation of the information, increasing assets volatility and generating temporary mispricing (Baker & Wurgler, 2006; Kumari & Mahakud, 2015) In this context, investor sentiment can be understood as the component of assets’ price that is not justified by its fundamental (Smales, 2016) and as a systematic risk of assets that are priced by the market (Lee, Jiang, & Indro, 2002; Schneller, Heiden, & Hamid, 2018; Yu & Yuan, 2011)
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