The volatility connectedness of US industries: The role of investor sentiment

Abstract

We investigate the influence of investor sentiment on the high-frequency volatility connectedness of US industry stock portfolios. Using a time series network approach, we find that two connectedness lags and triangular peer effects explain a significant amount of the network’s variability. We further find that squared investor sentiment is associated with a significant positive increase in the contribution of Energy stocks to volatility connectedness, at the expense of Consumer Services and Utilities stocks. The results imply the existence of sentiment-induced volatility transmission shocks driven by the Energy sector.