Impacts of relatively rational and irrational investor sentiment on realized volatility

Abstract

We adopt intraday data in this study to facilitate an exploration of the influences of relatively rational and irrational investor sentiment on volatility within the Taiwan stock markets. Following the decomposition of daily trading volume within the Taiwan Stock Exchange Capitalization Weighted Stock Index (TWSE) into two subsets, comprising the trading volume of institutional investors and individual investors, we go on to investigate the influence of each subset on realized volatility. We reveal that the relatively rational sentiment of institutional investors plays a stabilizing role in future volatility, whereas the relatively irrational sentiment of individual investors tends to exacerbate such volatility. Therefore, we suggest that our modified model, which takes into account the relatively rational and irrational sentiment of investors, is capable of more accurately predicting volatility than the benchmark model.