Exploring the relationship between investor sentiment and price volatility

By performing Grey relation analysis, this study elucidates the relationship between investor sentiment and price volatility in the Taiwanese stock market. A sequential relationship is identified between investor sentiment and price volatility, and ranked according to order of importance. Analytical results show that short sales volumes may be an individual leading indicator useful in observing the effects of sentiment on price volatility, followed by open interest put/call ratios and trading volumes, and buy/sell orders. Institutional investors are related, to a lesser extent, to price volatility and sentiment. Qualified foreign institutional investors, or more rational investors, are the least influenced by price volatility, followed by securities investment trust companies and dealers. TAIEX options exert the strongest influence on sentiment during the study period, making them a valuable reference for gauging price volatility.