Assessing the Relationship Between Stock Market Volatility and Investor Sentiment in Global Capital Markets

Posted: Nov 25, 2007

• Logan Hill
• Jack Roberts
• Luna Baker

Abstract

This research introduces a novel methodological framework for analyzing the dynamic relationship between stock market volatility and investor sentiment across global capital markets, employing a multi-modal data fusion approach that integrates traditional financial indicators with unconventional sentiment proxies drawn from digital communication patterns, search engine behavior, and linguistic analysis of financial discourse. Unlike conventional studies that rely predominantly on survey-based sentiment indicators or limited textual analysis, our approach captures the multidimensional nature of investor sentiment through a composite index derived from seven distinct data streams, including cryptocurrency forum discussions, financial meme propagation patterns, and cross-platform social media sentiment convergence. We develop a temporal-causal network methodology that identifies bidirectional feedback loops between volatility and sentiment components across different market regimes, revealing previously undocumented asymmetries in how sentiment shocks propagate through developed versus emerging markets. Our analysis spans 15 major global markets over a 12-year period encompassing multiple market crises and recovery phases, demonstrating that sentiment-driven volatility amplification exhibits significant cultural and institutional dependencies. The findings challenge traditional efficient market assumptions by revealing systematic sentiment persistence patterns that create predictable, albeit complex, volatility dynamics. This research contributes to behavioral finance literature by providing a more nuanced understanding of how digital-era communication channels have transformed the sentiment-volatility relationship, offering practical implications for risk management, regulatory policy, and algorithmic trading strategies in increasingly interconnected global markets.