Abstract
PurposeThis paper examines the impact of political instability on the investors' behavior, measured by Google search queries, and on the dynamics of stock market returns.Design/methodology/approachFirst, by using the DCC-GARCH model, the authors examine the effect of investor sentiment on the Tunisian stock market return. Second, the authors employ the fully modified dynamic ordinary least square method (FMOL) to estimate the long-term relationship between investor sentiment and Tunisian stock market return. Finally, the authors use the wavelet coherence model to test the co-movement between investor sentiment measured by Google Trends and Tunisian stock market return.FindingsUsing the dynamic conditional correlation (DCC), the authors find that Google search queries index has the ability to reflect political events especially the Tunisian revolution. In addition, empirical results of fully modified ordinary least square (FMOLS) method reveal that Google search queries index has a slightly higher effect on Tunindex return after the Tunisian revolution than before this revolution. Furthermore, by employing wavelet coherence model, the authors find strong comovement between Google search queries index and return index during the period of the Tunisian revolution political instability. Moreover, in the frequency domain, strong coherence can be found in less than four months and in 16–32 months during the Tunisian revolution which show that the Google search queries measure was leading over Tunindex return. In fact, wavelet coherence analysis confirms the result of DCC that Google search queries index has the ability to detect the behavior of Tunisian investors especially during the period of political instability.Research limitations/implicationsThis study provides empirical evidence to portfolio managers that may use Google search queries index as a robust measure of investor's sentiment to select a suitable investment and to make an optimal investments decisions.Originality/valueThe important research question of how political instability affects stock market dynamics has been neglected by scholars. This paper attempts principally to fill this void by investigating the time-varying interactions between market returns, volatility and Google search based index, especially during Tunisian revolution.
Highlights
Political instability is one of the most important impediments to economic development
Motivated by the critical period, which is characterized by the starting of the Tunisian revolution in 2011, the objective of this study is to empirically examine the impact of political instability on the return, volatility and sentiment of the Tunisian stock market
Literature review In the literature, we found a number of research studies that have studied the effect of investor sentiment on stock returns and the effect of investor sentiment on realized volatility, respectively
Summary
Political instability is one of the most important impediments to economic development. The political risk remains valued by investors because this risk often has a strong impact on investor confidence, usually their feelings and emotions, and has a greater impact on the economy, performances and volumes of financial market transactions (Beaulieu et al (2006), Bailey et al (2005) and Frey and Waldenstrom (2004). Several studies have looked at the effects of political instability on financial market performance. Frieden et al (2000) study the impact of political economy factors on exchange rate policy in Latin America. Arfan et al (2012) concludes that the political instability is one of the main causes that affects the capital inflows in Pakistan
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
