Idiosyncratic volatility, investor sentiment, and returns of the GCC stock markets

Standard finance theory suggests that idiosyncratic volatility should not influence stock returns. In reality, if investors are unable to achieve efficient diversification, such risk may affect stock returns. The purpose of the study is to examine the presence of idiosyncratic volatility and sentime...

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Autor principal:	Shah Saeed Hassan Chowdhury
Formato:	article
Lenguaje:	EN
Publicado:	LLC "CPC "Business Perspectives" 2021
Materias:	emerging stock markets size effects stock market sentiment unsystematic risk Finance HG1-9999
Acceso en línea:	https://doaj.org/article/95064be1ff4446c98b9536c0bc2c500f
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spelling	oai:doaj.org-article:95064be1ff4446c98b9536c0bc2c500f2021-11-22T09:08:33ZIdiosyncratic volatility, investor sentiment, and returns of the GCC stock markets10.21511/imfi.18(4).2021.171810-49671812-9358https://doaj.org/article/95064be1ff4446c98b9536c0bc2c500f2021-11-01T00:00:00Zhttps://www.businessperspectives.org/images/pdf/applications/publishing/templates/article/assets/15835/IMFI_2021_04_Chowdhury.pdfhttps://doaj.org/toc/1810-4967https://doaj.org/toc/1812-9358Standard finance theory suggests that idiosyncratic volatility should not influence stock returns. In reality, if investors are unable to achieve efficient diversification, such risk may affect stock returns. The purpose of the study is to examine the presence of idiosyncratic volatility and sentiment in the stock markets of the GCC (Gulf Cooperation Council) countries. Monthly idiosyncratic volatility is estimated using the Fama-French three-factor model. A unified sentiment proxy for each market is created by employing Principal Component Analysis (PCA). Then, Ordinary Least Squares (OLS) regressions are applied. F-statistics, t-statistics, and adjusted R2s are used to test the presence of idiosyncratic volatility and sentiment in the GCC markets.Findings show that the effect of sentiment on stock returns is observed across all the GCC markets. Investor sentiment can weakly explain the effect of idiosyncratic volatility on stock returns. In general, investors do not price expected idiosyncratic volatility, and only the unexpected part of it affects stock returns. Overall, the first implication for investors is that they must consider market sentiment to predict the cross-section of stock prices and should not completely ignore the influence of idiosyncratic volatility on stocks. Secondly, the implication for policymakers is that they should motivate companies to go public so that investors have more options to diversify their portfolios across different sectors.Shah Saeed Hassan ChowdhuryLLC "CPC "Business Perspectives"articleemerging stock marketssize effectsstock market sentimentunsystematic riskFinanceHG1-9999ENInvestment Management & Financial Innovations , Vol 18, Iss 4, Pp 190-202 (2021)
institution	DOAJ
collection	DOAJ
language	EN
topic	emerging stock markets size effects stock market sentiment unsystematic risk Finance HG1-9999
spellingShingle	emerging stock markets size effects stock market sentiment unsystematic risk Finance HG1-9999 Shah Saeed Hassan Chowdhury Idiosyncratic volatility, investor sentiment, and returns of the GCC stock markets
description	Standard finance theory suggests that idiosyncratic volatility should not influence stock returns. In reality, if investors are unable to achieve efficient diversification, such risk may affect stock returns. The purpose of the study is to examine the presence of idiosyncratic volatility and sentiment in the stock markets of the GCC (Gulf Cooperation Council) countries. Monthly idiosyncratic volatility is estimated using the Fama-French three-factor model. A unified sentiment proxy for each market is created by employing Principal Component Analysis (PCA). Then, Ordinary Least Squares (OLS) regressions are applied. F-statistics, t-statistics, and adjusted R2s are used to test the presence of idiosyncratic volatility and sentiment in the GCC markets.Findings show that the effect of sentiment on stock returns is observed across all the GCC markets. Investor sentiment can weakly explain the effect of idiosyncratic volatility on stock returns. In general, investors do not price expected idiosyncratic volatility, and only the unexpected part of it affects stock returns. Overall, the first implication for investors is that they must consider market sentiment to predict the cross-section of stock prices and should not completely ignore the influence of idiosyncratic volatility on stocks. Secondly, the implication for policymakers is that they should motivate companies to go public so that investors have more options to diversify their portfolios across different sectors.
format	article
author	Shah Saeed Hassan Chowdhury
author_facet	Shah Saeed Hassan Chowdhury
author_sort	Shah Saeed Hassan Chowdhury
title	Idiosyncratic volatility, investor sentiment, and returns of the GCC stock markets
title_short	Idiosyncratic volatility, investor sentiment, and returns of the GCC stock markets
title_full	Idiosyncratic volatility, investor sentiment, and returns of the GCC stock markets
title_fullStr	Idiosyncratic volatility, investor sentiment, and returns of the GCC stock markets
title_full_unstemmed	Idiosyncratic volatility, investor sentiment, and returns of the GCC stock markets
title_sort	idiosyncratic volatility, investor sentiment, and returns of the gcc stock markets
publisher	LLC "CPC "Business Perspectives"
publishDate	2021
url	https://doaj.org/article/95064be1ff4446c98b9536c0bc2c500f
work_keys_str_mv	AT shahsaeedhassanchowdhury idiosyncraticvolatilityinvestorsentimentandreturnsofthegccstockmarkets
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Idiosyncratic volatility, investor sentiment, and returns of the GCC stock markets

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