The predictive ability of consumer sentiment's volatility to the Malaysian stock market's volatility

Abstract

In this paper, we examine the predictive ability of consumer sentiment volatility on the volatility of stock returns in Malaysia. We also investigate the relationship between volatility of consumer sentiment and volatility of stock market returns with a focus on the 2008 global financial crisis. The consumer sentiment index is derived from a national survey of 1,200 Malaysian households including a measurement of the level of consumers' optimism or pessimism in regards to the economy. Although the surveys measure the general outlook of households in regards to the economy, the present paper provides distinct evidence that the consumer sentiment index is relevant to the Malaysian stock market behaviour. Results show that volatility of consumer sentiment index holds significant predictive power in explaining the behaviour of stock market volatility measured by GARCH (1,1). Findings also provide evidence of significant predictive power of the consumer sentiment volatility to stock market volatility during the 2008 global financial crisis.