The Impact of Retail Investors Sentiment on Conditional Volatility of Stocks and Bonds

TL;DR

This paper investigates how retail investors' sentiment influences the conditional volatility of stocks and bonds, revealing market state-dependent effects and providing novel insights into bond market sentiment measurement.

Contribution

It introduces the first measurement of retail investor sentiment's impact on bond volatility using a unique dataset from the Tel Aviv Stock Exchange.

Findings

Sentiment changes affect stock and bond volatilities differently.

Market states influence the magnitude and direction of sentiment effects.

First empirical evidence of retail sentiment impact on bond volatility.

Abstract

We measure bond and stock conditional return volatility as a function of changes in sentiment, proxied by six indicators from the Tel Aviv Stock Exchange. We find that changes in sentiment affect conditional volatilities at different magnitudes and often in an opposite manner in the two markets, subject to market states. We are the first to measure bonds conditional volatility of retail investors sentiment thanks to a unique dataset of corporate bond returns from a limit-order-book with highly active retail traders. This market structure differs from the prevalent OTC platforms, where institutional investors are active yet less prone to sentiment.