IMPACT OF INVESTORS’ SENTIMENT ON STOCK VOLATILITY: EVIDENCE FROM THE NIGERIAN EXCHANGE LIMITED (NGX)

Abstract

Stock market fundamentals play a role in valuing financial assets. However, the volatility in asset prices often causes them to deviate from their intrinsic value, indicating that fundamentals alone are insufficient for valuation. This led to a study that aimed to examine how investors' sentiment affects stock volatility of quoted companies on the Nigerian Exchange Limited (NGX). The study utilized data on direct and indirect investors' sentiment obtained from the CBN Consumer Expectation Survey Report and the Security and Exchange Commission Statistical Bulletin, respectively. A purposive sampling technique was employed to select 22 companies, accounting for over 80% of the NGX's total market capitalization among the 170 quoted companies as of December 2021. The study employed the Augmented Dickey-Fuller (ADF) unit root test to determine variable integration orders and utilized GARCH (1,1) as the estimation technique. The findings indicated that direct investors' sentiment had a positive relationship with stock volatility (coefficient: 0.00049, p-value: 0.001), while indirect investors' sentiment had a negative relationship (coefficient: -0.0066, p-value: 0.000), both significant at a 1% level. This suggests that bullish sentiment from irrational traders leads to higher volatility, while bearish sentiment leads to lower volatility. Furthermore, the study found evidence of volatility clustering in stock returns attributed to investors' sentiment on the NGX. In conclusion, the study highlights the critical role of both direct and indirect investors' sentiment in stock return volatility in Nigeria. As a result, it recommends considering investors' sentiment as a risk factor in addition to fundamental factors when making investment decision, and advises investors to maintain a well-diversified portfolio to mitigate sentiment-oriented risks associated with investing in financial assets.