Could the Volatility Be a Measure of Investors’ Optimism?

Abstract

The optimism is rather the psychological term describing belief of someone in success or hopefulness and confidence in the decision-making process. After Kahneman and Tversky’s “prospect theory” (Kahneman and Tversky in Econometrica 47:263–291, 1979 [9]) the perception of the role of psychology in economic activities of investors was totally changed. The works of these two authors revolutionized the academic attempt to human judgement. The using of terms “heuristic and biases” caused that errors of theoretical models became to be explained as the result of the influence of human nature (Gilovich and others in Heuristic and biases: the psychology of intuitive judgement. Cambridge University Press, UK, 2002 [5]). The trading volume on stock exchanges always confirms market trends and signals from technical analysis. It is possible to assume that during the growing trend, increase in trading volume describes a belief of investors in the bull market and during decreasing trend in bear market. Both situations could be treated as symptoms of optimism and pessimism of investors. The main goal of the article is to examine that the volatility could be an indicator of investors’ optimism. So, the main hypothesis is that trading volume could be modelled by the market risk (standard deviation of rates of return) using econometric models. Such hypothesis is supported by additional—the sign of the rate of return is a significant binary variable for econometrical describing of trading volume. Different methods of estimation of the volatility parameter will be used in the research—from classical statistics to ARCH-type models. Different length of the time window of the standard deviation calculating was taken into account and the 180 trading days window was chosen for the analysis according to similar works from the past (Majewska in Przeg. Stat. 1–2, 161–170, 2000 [12]). The data used for verification of raised hypothesis was taken from the Warsaw Stock Exchange, and it concerns the group of chosen stock exchange indexes listed on the Warsaw Stock Exchange.