Journal
INTERNATIONAL JOURNAL OF FORECASTING
Volume 22, Issue 1, Pages 109-123Publisher
ELSEVIER
DOI: 10.1016/j.ijforecast.2005.04.019
Keywords
causality; investor surveys; market based sentiment measures; realized volatility; stock index returns
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Previous papers that test whether sentiment is useful for predicting volatility ignore whether lagged returns information might also be useful for this purpose. By doing so, these papers potentially overestimate the role of sentiment in predicting volatility. In this paper we test whether sentiment is useful for volatility forecasting purposes. We find that most of our sentiment measures are caused by returns and volatility rather than vice versa. In addition, we find that lagged returns cause volatility. All sentiment variables have extremely limited forecasting power once returns are included as a forecasting variable. (c) 2005 International Institute of Forecasters. Published by Elsevier B.V All rights reserved.
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