Extreme Return, Extreme Volatility and Investor Sentiment


Xu Gong, Fenghua Wen, Zhifang He, Jia Yang, Xiaoguang Yang, Bin Pan




The extreme return and extreme volatility have great influences on the investor sentiment in stock market. However, few researchers have taken the phenomenon into consideration. In this paper, we first distinguish the extreme situations from non-extreme situations. Then we use the ordinary generalized least squares and quantile regression methods to estimate a linear regression model by applying the standardized AAII, the return and volatility of SP 500. The results indicate that, except for extremely negative return, other return sequences can cause great changes in investor sentiment, and non-extreme return plays a leading role in affecting the overall American investor sentiment. Extremely positive (negative) return can rapidly improve (further reduce) the level of investor sentiment when investors encounter extremely pessimistic situations. The impact gradually decreases with improvement of the sentiment until the situation turns optimistic. In addition, we find that extreme and non-extreme volatility cannot affect the overall investor sentiment.