The aim of the research paper is to examine the relationship between investor sentiment and stock market volatility in the context of Indian stock market. There is much research into the relationship between the two but very rarely taking India as a case, being the tenth largest economy of the world. Moreover, there has been scant research done on impact of political and economic events on investor sentiment and the stock markets. There is very little research determining if the events do make an impact on the sentiment of investor.
The research is based on taking four events into consideration over a period of five years (2008-2012) for investors. Simultaneously, the stock market volatility has also been studied for the same period of time of the BSE-Sensex (Bombay Stock Exchange- Sensitive Index). The events are Global Recession of 2008, Mumbai Terror Attack in 2008, the major Indian IT company Satyam Computer Systems scam and the fluctuations in Global oil prices after the Middle East crisis. The data of volatility, sentiments and average daily returns have been collected from various sources like BSE for the same period. To find the impact of each situation on the average daily returns, investor sentiments and volatility, SPSS was incorporated. Adding to this, a survey was also carried out through questionnaires distributed to investors to find the sentiments during that period and currently.
To strengthen the research, various financial journals and literature on the subject were reviewed. The research found while the Satyam scam had an impact on the average daily returns, it didn’t have a significant impact on the stock market volatility. Interestingly it showed that it had a very significant impact on the investors. For oil prices, research showed that the Egyptian turmoil didn’t have a significant impact on the average daily returns but it had a significant impact on the volatility as well as the investor sentiment which has been vindicated by the survey. Also, the Global Recession had very significant impact on all the factors viz. the daily returns, volatility and the sentiment. On Terror Attacks, the research showed that while there was not a significant impact on the stock market volatility but impact on the daily returns and investor sentiment was substantial. Author keywords: Investor sentiments, Indian stock markets, behavioural finance, volatility