Subjective/ Behavioural Factors Influence the PSI 20 and IBEX 35

Stefan Abrantes Costa,Pedro Manuel Nogueira Reis,Antonio Pedro Soares Pinto

doi:10.5430/ijfr.v11n5p13

Stefan Abrantes Costa, Pedro Manuel Nogueira Reis + Show 1 more

Open Access

https://doi.org/10.5430/ijfr.v11n5p13

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Abstract

This study assesses the impact of investor sentiment on the volatility of the PSI 20 and IBEX 35 from time series data from January 1988 to May 2019. The impact of investor sentiment on market and portfolio selection has aroused great interest in the literature, however the results obtained are not consensual, considering the different methodologies used to build sentiment indices, as well as the various levels of institutional development in the market.Asymmetric volatility behaviours according to good or bad news were evaluated using the TGARCH model. The results indicate that there is an asymmetric effect of good versus bad news on the volatility of IBEX 35. It was also noted that for Portugal and Spain investor sentiment presents statistical significance with a negative sign, suggesting that market volatility is more sensitive to negative shocks in the conditional variance. In Portugal, contrary to Spain, sentiment has no relevance on return. The study reveals that investor sentiment is a key factor in selecting investment in the market. The relationship that this establishes with volatility, can help to implement policies that allow to minimize future shocks’ impact on return. The study reveals for the first time that investor sentiment is a key factor in selecting investment in the market for Portugal.

Highlights

The study of financial markets has been gaining importance over time, and the behaviour and influence of investors on the global financial market has become important in recent years, as a better understanding of how it works and how stakeholders interact can help improve profitability
This study investigates the impact that investor sentiment has on the volatility of PSI 20 and IBEX 35, based on the methodology used by Aydogan (2016)
Consumer Confidence Index data attempted to capture the effect that investor sentiment would have on conditioned volatility

Summary

Introduction

The study of financial markets has been gaining importance over time, and the behaviour and influence of investors on the global financial market has become important in recent years, as a better understanding of how it works and how stakeholders interact can help improve profitability. To this end, a number of studies have been developed to assess how investor sentiment influences the market and portfolio selection (Baker & Wurgler 2006). Positive and negative news have distinct impacts on market volatility and to understand their effect on volatility the TGARCH model developed by Glosten, Jagannathan & Runkle (1993) and Zakoian (1994) was applied

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