Sentiment and stock market volatility revisited: A time-frequency domain approach

The cause and consequences of stock market volatility are considered to be a legitimate concern for market participants, regulators and policy makers. This article examines the relationship between investor sentiment and stock return volatility in the context of Indian stock market. Our empirical analysis for examining the sentiment and volatility relationship focuses on wavelet approach to carry out the time-frequency domain analysis. The results reveal that there is weak conditional correlation between sentiment and volatility. Investor sentiment is found to affect both conditional and realized volatility in the short as well as medium run. Results also show that small size stocks are more prone to the impact of sentiment. Significant co-movement between sentiments and return is noted during different volatile periods (pre-crisis, crisis and post-crisis) at different frequencies.