Knowing more about the impact of Investors’ Sentiment On The Realised Volatility

Investor sentiments are those sentiments towards a particular market or assets of the investors. Bullish refers to those investors who invest in a particular market that is expected to rise, and those investors who predict the price falls are known as Bearish. Realised volatility refers to the assessment of daily changes in the price of a security over a particular period.

The terms Investors sentiment and realised volatility create various impacts on the economy. A study shows that attention and sentiment variables improved the volatility forecasts. The concept of realised volatility can help in validating the volatility of stocks and a stock market index from high-frequency intraday data.  In this article, we will explain realised volatility prediction and investor sentiment.

Factors Affecting Investors’ sentiments

Investors’ sentiment describes irrational behaviour and attitude towards the stock market, leading to destructive investments. Listed below are factors that affect the investor’s sentiment.

Psychological and emotional factors

• Psychological and emotional factors such as overconfidence, greed, and fear play an important role in the decision-making on investments.

• Investment decisions can also be affected by the amalgamation of cognitive, emotional, and motivational characteristics.

• The biased judgement, such as the investor’s belief in his decision and ignoring others, may impact the investor’s sentiments.

• The overconfident investors trade more because they overestimate their capabilities. Such investors think they are better than average drivers or they are professionals in investing.

• The characteristics that affect the emotional and psychological components can be due to overconfidence of the investors, the effect on disposition or many other things like hoarding the stocks etc.

• The financial market return of eighteen countries holds the “consumer confidence index” as the proxy of investor sentiments.

• Usage of miniature samples or assumptions to conclude leads to wrongly categorised investments as profitable investments.

Market factor

• Some empirical studies state that market factors play an important role in the investor sentiments

• The market factors include:

•  bull/bear market, 

• market emperor-up/down studies the short/intermediate/long run

• nature of the market

• transparent / non-transparent

• market returns

• Existing stock fundamentals, stocks’ past trends, overreaction, and underreaction to price change are one of the crucial market-based factors affecting the investor sentiments on realised volatility prediction.

• Irrational sentiments of the investors, such as positive and negative turns of the stocks, impact the stock prices.

• The market volatility fluctuation in the bull and bear market is high due to investor sentiment.

• Sentiments of the investor dominate the stock return and volatility and hence lead to higher returns.

Economic factor 

• Economic factors include the real GDP, profits in corporations, inflation rate, interest rates, and fluidity in the economy.

• Macroeconomic factors like the rate of inflation, interest rate, and strength of the  Indian economy in determining the investment decision of the investors.

Herd behaviour 

• It is the Mutual imitation leading to a convergence of action.

• It is the concept where a group of investors invests/trades on the same side of the market over the same period, or the investors avoid their opinion and work on the opinions of other investors.

• Herd behaviour is the belief system of investors in investment decisions.

Investors awareness

• It includes the media, internet, social interactions, and private information recommendations.

• Financial awareness has the “ability to make informed judgments and to take effective decisions regarding the use and money management”. This was elucidated by Noctor et al.

• The change in levels of optimism and pessimism is measured in terms of the popularity of most searched terms among the small investors.

• Posting the stock exchange on the internet can be a source of information for the security market, banks and brokerage firms.

• The presence of media and the internet can directly influence market volatility and return.

Conclusion 

Investor sentiment is the sentiment towards the particular assets of the investors, whereas realised volatility is the daily assessment of price change in the stock market. These are interrelated with a fact called stocks, where the increased price in stock keeps investors from bull trader sentiments, and the low stock price represents the bear traders. The various impacts of the investors’ sentiments on the realised volatility are psychological factors, economic factors, market factors, Herd behaviour, and investor awareness. This article teaches about investor sentiment, realised volatility, and the leverage effect.