The Impact of Investor Sentiment on the Futures Market: Evidence from the Taiwan Futures Exchange

This study examines the impact of investor sentiment on the Taiwan Futures Exchange. The application of the EGB2 model reveals the existence of a clear and significant relationship between sentiment and volatility, particularly in the MSCI, TE and TF futures markets. We find that all sentiment variables have limited forecasting power, and that negative return shocks will ultimately lead to an increase in future volatility. We go on to determine whether lagged returns cause volatility, importing the SWARCH model of Hamilton (1994) to analyze the volatility regimes of investor sentiment, and find that the majority of investors will maintain the same regime in the next period. Our study suggests that the EGB2 model is effective in volatility forecasting, and that the SWARCH model is a useful method of discriminating between the volatility arising from investor sentiment in the futures market.