The impact of retail investor sentiment on the conditional volatility of stocks and bonds: Evidence from the Tel-Aviv stock exchange

Abstract

We measured bond and stock conditional return volatility as a function of changes in sentiment, proxied by six indicators of the Tel-Aviv Stock Exchange. We found that changes in sentiment affect conditional volatilities at different magnitudes and often in an opposite manner in the two markets, subject to market states. We are the first to measure the bond conditional return volatility of retail investor sentiment, thanks to a unique dataset from a limit-order book with highly active retail traders. This market structure differs from the prevalent over-the-counter platforms, where institutional investors are active, yet less prone to sentiment.