The Relationship between Sentiment and Risk in Financial Markets

Abstract

This article estimates association coefficients between measures of market sentiment and risk in the U.S., German and Chinese markets. In terms of risk, four measures were considered: standard deviation, value at risk, expected shortfall and shortfall deviation risk. For market sentiment, data was collected using the Psych Signal technology, which is based on the behavior of investors on social networks. The results indicate significant statistical associations, with the direction of association having financial meaning. Moreover, the empirical findings are valid for all risk measurements. The results are in keeping with the Prospect Theory, since in moments when the sentiment indicates low liquidity (a negative value for the difference between Bullish and Bearish Intensities) investors try to reduce the negotiation volume, which has a positive impact on risk. On the other hand, under the inverted scenario, when sentiment indicates high liquidity, there is an increase in the negotiation volume and a consequent decrease in risk. This article is important because its observations of market sentiment as measured by social media data show a consistent relationship with measures of financial risk.

Risk Aversion, Behavioral Finance and Green Bonds for the Sustainability of Environmental Assets in Peru

“…In their empirical study, Paraboni et al (2018) found an association between market sentiment and risk. This implies that the behavioral aspect of risk management should not be ignored, and the authors recommend that future studies further explore this relationship.…”

A Sustentabilidade E a Transparência Influenciam Tomada De Decisão Do Investidor Brasileiro?

“…Regarding the access to information and the level of risk taken by the investors, Kaufman e Weber (2013) identified that additional information (complementary information that firms provide) lead to more investor confidence, allowing them to take higher risks in their investments. Paraboni et al (2018) sought to understand the perceptions of liquidity and risk in the American, Chinese and German markets through the assumptions of the Prospect Theory. Their findings indicated that, when there is low perceived liquidity in the market, investors reduce the negotiated volume due to the increase in risk, and that in the opposite scenario, when there is high perceived liquidity, there is an increase in negotiations due to the decrease in risk.…”

Como o volume de negociação reage ao sentimento do investidor?

“…Em uma análise da relação entre risco e sentimento nos mercados americano, alemão e chinês, Paraboni et al (2018) confirmaram empiricamente que em momentos de baixa liquidez a percepção de risco dos investidores aumenta e por isso eles tendem a reduzir o volume de negociação. Por outro lado, em momentos de alta liquidez, há um aumento no volume de negociação e uma consequente diminuição no risco.…”

“…Consequentemente, e por extensão a esses resultados, é presumível que investidores com confiança insuficiente tenham mais aversão ao risco e diminuam suas negociações quando percebem que o resultado poderá ser negativo (Dhaoui et al 2013). Esse resultado corrobora com o trabalho de Paraboni et al (2018) que já havia encontrado evidências de que em momentos de baixa liquidez a percepção de risco dos investidores aumenta e eles tendem a reduzir o volume de negociação.…”

“…Os vieses comportamentais influenciam significativamente o declínio do volume de negócios e indicam que o volume de negociação é mais sensível à presença de investidores com menor nível de confiança, e no longo prazo. A partir desses resultados, é presumível que em momentos de baixa liquidez a confiança dos investidores decline e sua aversão ao risco aumente, e por isso diminuam suas negociações para evitar resultados negativos, confirmando proposições anteriores (Dhaoui et al 2013;Dhaoui & Bacha, 2017;Paraboni et al 2018).…”