RESREARCH

Research Proposal

M. Abdul Salam Advance Research Method

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Content:

Introduction………………………………………………….02

Problem statement…………………………………………….02

Statement of purpose………………………………………….03

Objectives……………………………………………………03

Literature Review…………………………………………….03-04

Research Questions…………………………………………..04

Theoretical Framework……………………………………….05

Hypothesis…………………………………………………….05

Research Design……………………………………………….06

References……………………………………………………..07

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Impact of investor sentiments on stock market volatility

Introduction

Traditional economic analyses show that people are rational and they do not care for emotions.
But, psychological literature indicates that emotions significantly impact judgment and decision
making in case of decision inculcating risk and uncertainty. Emotions are weighted in
determining the behavior of investors. Emotions are witnessed to influence economic decisions
and behavior. People connect their feelings or mood to wrong sources and make incorrect
judgments. Happy mood pushes people to process information less detailed, less systematically
and less energetically. While in unhappy mood people process information more systematically
and carefully. Thus, when investors be happy they exaggerate value of stock from fundamentals.
While in unhappy mood they deteriorate the value of equity from fundamentals. Simultaneously,
in happy and unhappy mood, they create bullish or bearish market conditions. In result,
sentiments affect stock price volatility and volume of trade. We use status updates on Facebook
across 2 countries from March 2012 to September 2017 to capture the change in sentiments
within a country. The status updates are meaningful about sentiment that are defined by
investorwords.com as “a measurement of the mood of a given investor or the overall investing
public, either bullish or bearish.” Because Facebook’s Data Team records both the daily
appearance of positive and negative words in status updates. So, as per theoretical models
predicting that change in sentiments or the mood cause the trading. We find that change in
investors’ sentiment positively affect trading volume and stock market volatility. Investor
sentiment is exogenous variable while stock market volatility is endogenous variable. Our results
indicate the important impact of sentiment with financial market that is out of the effect of
sentiment levels.
Problem statement

Traditional economic system is totally based on production and distribution. This system is
lacking the importance of human sentiments (mood and emotion) during making economic
decisions.

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Statement of purpose

The study purpose is to find the relation between investor sentiment (happy mood and unhappy
mood) and stock market volatility (stock price and volume of trade). Sentiments of investors
vary every day. Since, there are investors who are known as market makers and may change
market prices of shares. Investor means both institutional and retail investors. Institutional
investors hold less volume of shares for a certain period while retail investors trade bulk volume
of shares instantly. They keep eagled eye at market sentiments like rising prices and falling
prices. And market sentiments lead to stock market volatility. Ups and downs in the stock market
are known stock market volatility.

Objectives

This study will contribute to the literature of financial behavior by finding the impact of investor
sentiment on stock market volatility. And study will help to find the overall impact of investors’
sentiment on their decisions. It will enhance our understanding of the pattern of stock market
during special events like festivals, sports, cloudy weather and economic news. Simultaneously,
we will consider sentiment factors during pricing of an asset.

Literature Review

Influence of sentiments is perceived as unimportant. Sentiments are viewed as too complex to

evaluate. But, psychological research and sentiment factors are so cemented. As per studies of
(Elster, 1998), and (Hermalin and Isen, 2000) psychological study shows that sentiments
systematically and significantly influence decision-making especially for decisions involving
risk and uncertainty. According to (Loewenstein, 2000), making decisions during emotional
movements drive behavior to become irrational. The study of (Forgas, 1995) suggested that
impact of emotions on the decision making is positively linked with the embedded complexity as
well as uncertainty. Likewise, (Finucane, Peters, and Slovic, 2003) indicated that the most people
depend upon heuristics for the most difficult tasks. Since, (Shiv and Fedorikhin 1999), whenever
heart conflicts with mind, heart often wins. The researcher (Hanoch, 2002) further indicated that

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when there is bounded rationality than people often depend upon mood to make satisfactory
decision. (Sinclair and Mark, 1995) claimed that people who remain happy perform less than the
people who remain unhappy in solving the problem and making the decision while becoming
more careful and processing actively improves performance. According to the study of Siganos,
A., Vagenas-Nanos, E., & Verwijmeren, P. (2017) divergence of sentiment positively influences
trading volume and stock price volatility. Sentiments (Time Preference and Risk Attitude are
considered). Time preference is framing a choice as a delay versus an advance significantly
impacts decisions. Risk attitude affects the price investors are willing to pay for an asset. Study
shows that changes in time preferences can produce significant equity price volatility and shifts
in risk attitude bring influence. In addition, discussed factors are not so much comprehensive to
consider the impact of investors’ sentiment on stock market volatility. Still, there is confusion to
find the link between sentiments and stock market volatility. So, we need more studies to find the
relation between investors’ sentiment and stock market volatility. There can be other sentiment
manipulating factors cloudy weather, sport events and festivals. These factors trigger investors to
get into happiness.

Chang, S. C., Chen, S. S., Chou, R. K., & Lin, Y. H (2008) finds that cloudy weather is
connected to high transaction volumes. Harris, M., & Raviv, A. (1993), who discuss that more
divergence of investors’ sentiments leads to more absolute price fluctuations. So, by linking
psychological research and sentiment factors and introducing sentiment factors into a traditional
asset-pricing model, this investigation shows that sentiment fluctuations have rich importance in
economic and financial analyses. For instance, stock prices correlate with investor sentiments.
Higher the positive mood and higher will be the stock price.

Research Questions

Do investor sentiments affect stock price?

Do investor sentiments affect trading volume?

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Theoretical Framework

STOCK PRICE

INVESTOR
SENTIMENT

TRADING VOLUME

It is assumed that investors are rational. They make decisions involving risk and uncertainty
sensibly. And theoretical framework consists of one independent variable (investor sentiment)
and two dependent variables (stock price and trading volume). The model indicates that Investor
sentiment positively affects stock price and trading volume volatility. Investor sentiment will be
measured by two proxy variables like happy mood and unhappy mood. While, market volatility
will be measured by stock price and trading volume.

Hypothesis

H1: Investor sentiment positively influences stock price.

H2: Investor sentiment positively influences trading volume.

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Research Design/Methodology

We are given with a research purpose that is prolonged discussion and its nature matches to
descriptive studies. So, here we will go with an approach of descriptive study. The purpose of
descriptive research is to depict the complete design of above mentioned situation. And, sample
period would be March 2012 to September 2017. We would download daily optimistic and
pessimistic sentiment data from Facebook that are available for 2 international markets (India
and Singapore). Since, optimistic sentiment level would be signal of investment or buying the
stock. And pessimistic sentiment level would indicate to sell the stock. Facebook would shape
these sentiment indexes by analyzing the percentage of positive and negative status update terms
as defined in the Linguistic Inquiry and Word Count Dictionary. Here, the unit of analysis would
be individual investor and the type of study would be causal study. Statistical Hypothesis Testing
(Pooled t-Test) would be used to perform hypothesis test. Data would be proceeded by Excel.

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References

Elster, J. (1998). Emotions and economic theory. Journal of economic literature, 36(1), 47-74.

Hermalin, B., & Isen, A. (2000). The effect of effect on economic and strategic decision making.

Loewenstein, G. (2000). Emotions in economic theory and economic behavior. American

economic review, 90(2), 426-432.

Forgas, J. P. (1995). Mood and judgment: the affect infusion model (AIM). Psychological
bulletin, 117(1), 39.

Finucane, M. L., Peters, E., & Slavic, P. (2003). 1o Judgment and Decision Making: The Dance
of Affect and Reason. Emerging perspectives on judgment and decision research, 327.

Sinclair, R. C., & Mark, M. M. (1995). The effects of mood state on judgmental accuracy:
Processing strategy as a mechanism. Cognition & Emotion, 9(5), 417-438.

Chang, S. C., Chen, S. S., Chou, R. K., & Lin, Y. H. (2008). Weather and intraday patterns in
stock returns and trading activity. Journal of Banking & Finance, 32(9), 1754-1766.

Harris, M., & Raviv, A. (1993). Differences of opinion make a horse race. The Review of
Financial Studies, 6(3), 473-506.

Siganos, A., Vagenas-Nanos, E., & Verwijmeren, P. (2017). Divergence of sentiment and stock
market trading. Journal of Banking & Finance, 78, 130-141.

Created By Abdul Salam