Rational and Sentimental Components in Long-term Stock Volatility

• Main Authors: Yu-Cheng Yeh, 葉育誠
• Other Authors: Jin-Huei Yeh
• Format: Others
• Language: en_US
• Published: 2011
• Online Access: http://ndltd.ncl.edu.tw/handle/69342824475401938386

碩士 === 國立中央大學 === 財務金融研究所 === 99 === How to precisely forecast the uncertainty of asset return is one of the most important issues in finance. This thesis aims to construct a new innovative volatility model by reconciling both the macroeconomic fundamentals and investor sentimental variables from both the rational and behavioral literature, with an application to modern risk management. Fundamental and sentimental factors are employed to capture the long-run volatility of asset return via the spline-GARCH proposed by Engle and Rangel (2008). Our model is successful in allowing for behavioral biases from the emotional and sentimental behaviors among investors during the period of financial crisis. Specifically, we characterize how much both parts contributes to the total variation of price changes and found that the fundamental contributed variations dominated. However, the proportion from the behavioral factor explained variation tends to grow in the recent years. Our empirical results suggest that the information disclosed from both parts is shown to improve the performance of volatility modeling, particularly in the longer horizon, and in tail risk management.