The Predictive Value of Investor Sentiment Index on the Volatility of the Malaysian Stock Market

  • Nathrah Yacob Taylor’s Business School, Taylor’s University
  • Nurul Shahnaz Ahmad Mahdzan Department of Finance and Banking, Faculty of Business and Accountancy, University Malaya
  • Hamzah Arof Faculty of Engineering University of Malaya

Abstract

Motivated by evidence that excess volatility could not be explained by the present standard value efficient market models coupled with the irrational behavioural anomaly observed in the Malaysian stock market, this study aims to construct the investors’ sentiment index. The measure is intended to test whether the excess volatility may be contributed by non-fundamental factors. The index includes five proxies: stock market turnover, the number of initial public offerings, IPO initial returns, advancer decliner’s ratio, and the widely applied consumer sentiment index. Factor analysis is employed to identify the common underlying factors from the suggested proxies to construct a composite index. The results suggest that the index is a reliable tool that is able to predict the volatility of the Malaysian Kuala Lumpur Composite Index (KLCI). These findings may be applied by practitioners to assist in making investment strategies, and, in addition, to an alternative paradigm in the asset pricing model.


Keywords: Investor Sentiment, Stock Market Volatility, Behavioural Finance, Malaysian Stock Market
JEL Classification: E22, F30

References

Aggarwal, R., Leal, R., & Hernandez, L. (1993). The Aftermarket Performance of Initial Public Offerings in Latin America. The Journal of the Financial Management Association, 22(1), 42-53.
Ali, N., Md Nassir, A., Hassan, T., & Zainal Abidin, S. (2009). Does Bursa Malaysia Overreact ? International Research Journal of Finance and Economics, (34), 175-193.
Ali, N., Md Nassir, A., Hassan, T., & Zainal Abidin, S. (2010). Short Run Stock Overreaction : Evidence from Bursa Malaysia. International Journal of Economics and Management, 4(2), 319-333.
Angabini, A., & Wasiuzzaman, S. (2011). GARCH models and financial crisis a study of the malaysian stock market. The International Journal of Applied Economics and Finance, 5(3), 226-236.
Asteriou, D., & Hall, S. G. (2007). Applied Econometrics: A Modern Approach Using Eviews and Microfit. Palgrave Macmillan.
Baker, M. P., & Stein, J. (2004). Market liquidity as a sentiment indicator. Journal of Financial Markets, 7(3), 271-299.
Baker, M. P., & Wurgler, J. (2006). Investor Sentiment and the Cross-Section of Stock Returns. The Journal of Finance, 61(4), 1645-1680.
Baker, M. P., Wurgler, J., & Yuan, Y. (2012). Global, Local, and Contagious Investor Sentiment. Journal of Financial Economics, 104(2), 272-287.
Baker, M., & Wurgler, J. (2007). Investor Sentiment in the Stock Market. Journal of Economic Perspectives, 21(2), 129-151.
Beltratti, A., & Morana, C. (2002). Breaks and Persistency : Macroeconomic Causes of Stock Market Volatility. Journal of Econometrics, 131(1-2), 1-66.
Brailsford, T. J., & Faff, R. W. (1996). An evaluation of volatility forecasting techniques. Journal of Banking & Finance, 20(3), 419-438.
Brown, G. W. (1999). Volatility, Noise Traders. Financial Analysts Journal, 55(2), 82-90.
Brown, G. W., & Cliff, M. T. (2004). Investor sentiment and the near-term stock market. Journal of Empirical Finance, 11(1), 1-27.
Brown, G. W., & Cliff, M. T. (2005). Investor Sentiment and Asset Valuation. Journal of Business, 78(2), 405-440.
Chan, W., Frankel, R., & Kothari, S. (2004). Testing behavioral finance theories using trends and consistency in financial performance. Journal of Accounting and Economics, 38, 3-50.
DeLong, J. B., Shleifer, A., Summers, L. H., & Waldmann, R. J. (1990). Positive Feedback Investment Strategies and Destabilizing Rational Speculation. The Journal of Finance, 45(2), 379-395.
Derrien, F. (2005). IPO Pricing in “Hot” Market Conditions : Who Leaves Money on the Table ? The Journal of Finance, 60(1), 487-521.
Dickey, D. A., & Fuller, W. A. (1979). Distribution of the Estimators for Autoregressive Time Series With a Unit Root. Journal of American Statistical Association, 74(366), 427-431.
Diebold, F. X., & Yilmaz, K. (2008). Macroeconomic Volatility and Stock Market Volatility, Worldwide (No. E0, G1). Cambridge.
Dorn, D. (2009). Does Sentiment Drive the Retail Demand for IPOs? Journal of Financial and Quantitative Analysis, 44(01), 85.
Engle, R. F., Ghysels, E., & Sohn, B. (2013). Stock Market Volatility and Macroeconomic Fundamentals. Review of Economics and Statistics, 95(3), 776-797.
French, K. R., Schwert, G. W., & Stambaugh, R. F. (1987). Expected stock returns and volatility. Journal of Financial Economics, 19, 3-29.
Harvey, C. R. (1989). Forecasts of economic growth from the bond and stock markets. Financial Analysts Journal Journal, (September - October), 38-45.
Kim, K., & Nofsinger, J. (2008). Behavioral finance in Asia. Pacific-Basin Finance Journal, 16(1-2), 1-7.
Kraft, J., & Kraft, A. (1977). Determinants of Common Stock Prices: A Time Series Analysis. The Journal of Finance, 32(2), 417-425.
Lee, C. M. C., Shleifer, A., & Thaler, R. H. (1991). Investor Sentiment and Closed-End Fund Puzzle. The Journal of Finance, 46(1), 75-109.
Lee, W. Y., Jiang, C. X., & Indro, D. C. (2002). Stock market volatility, excess returns, and the role of investor sentiment. Journal of Banking and Finance, 26(12), 2277-2299.
Lowry, M. (2003). Why does IPO volume fluctuate so much? Journal of Financial Economics, 67, 3-40.
Neal, R., & Wheatley, S. M. (1998). Do measures of investor sentiment predict returns. Journal of Financial and Quantitative Analysis, 33(4),523-547.
Pesaran, H., & Shin, Y. (1997). An Autoregressive Distributed Lag Modelling Approach to Cointegration Analysis. In Econometrics and Economic Theory in the 20th Century: The Ragnar Frisch Centennial Symposium, Strom S. Cambridge: Cambridge University Press.
Pesaran, H., Shin, Y., & Smith, R. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289-326.
Phillips, P. C. ., & Perron, P. (1988). Testing for a Unit Root in Time Series Regression. Biometrika, 75, 335-346.
Rahman, A. A., Sidek, N. Z. M., & Tafri, F. H. (2009). Macroeconomic determinants of Malaysian stock market. African Journal of Business Management, 3(3), 95-106.
Ritter, jay R., & Welch, I. (2002). A Review of IPO Activity, Pricing and Allocations. The Journal of Finance, 57(4), 1795-1828.
Shiller, R. J. (1987). The Volatility of Stock Market Prices. Science, New Series, 235(4784), 33-37.
Shiller, R. J. (1989). Market Volatility. Cambridge: MIT Press, Cambridge, MA.
Verma, R., & Verma, P. (2007). Noise trading and stock market volatility. Journal of Multinational Financial Management, 17(3), 231-243.
Yung, C., Colak, G., & Wang, W. (2008). Cycles in the IPO market. Journal of Financial Economics, 89(1), 192-208.
Published
2016-12-01
How to Cite
YACOB, Nathrah; AHMAD MAHDZAN, Nurul Shahnaz; AROF, Hamzah. The Predictive Value of Investor Sentiment Index on the Volatility of the Malaysian Stock Market. Asian Journal of Accounting Perspectives, [S.l.], p. 13-29, dec. 2016. ISSN 0128-0384. Available at: <https://ajap.um.edu.my/index.php/AJAP/article/view/5899>. Date accessed: 16 dec. 2017.