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Abstract
Using a new variable to measure investor sentiment we show that the sentiment of German and European investors matters for return volatility in local stock markets. A flexible empirical similarity (ES) approach is used to emulate the dynamics of the volatility process by a time-varying parameter that is created via the similarity of realized volatility and investor sentiment. Out-of-sample results show that the ES model produces significantly better volatility forecasts than various benchmark models for DAX and EUROSTOXX. Regarding other international markets no significant difference between the forecasts can be observed.
Keywords: Volatility forecasting; investor sentiment; empirical similiarity; local information advantage
Published Online: 2019-11-30
Published in Print: 2018-05-01
© 2019 by Walter de Gruyter Berlin/Boston
