Investor Sentiment and Stock Volatility: Evidence from the Nigerian Exchange Limited (NGX)

Abstract

Market fundamentals’ role in financial assets valuation cannot be denied. However, the volatility in asset prices often causes them to deviate from their intrinsic value due to irrational behaviour of certain investors, indicating that fundamentals alone are insufficient for asset valuation. This motivated this study to examine how direct and indirect investor sentiment affects stock price volatility of quoted companies on the Nigerian Exchange Limited (NGX) from January 2014 to December 2021. Data were obtained from the CBN Consumer Expectation Survey Report and the Security and Exchange Commission Statistical Bulletin, respectively. The study employed GARCH (1,1) as the estimation technique. The findings showed that direct investor sentiment with (???? = 0.00049, p-value = 0.001) has positive significant impact on stock volatility, while indirect investors' sentiment has negative significant impact (???? = -0.0066, p-value: 0.000). These findings suggest that optimistic sentiment from irrational traders leads to higher volatility, while pessimistic sentiment results in lower volatility. In addition, the study found evidence of volatility clustering in stock prices on the NGX attributed to investor sentiment. In conclusion, the study highlights the critical role of both direct and indirect investor sentiment as a systematic factor influencing stock 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 quoted firms to improve on investor communication strategies, ensuring timely and accurate information is shared to reduce uncertainty and irrational market reactions.