Evaluating the Linkage Between the Market Mood Index and the Indian Stock Market: Evidence Based on ARDL Bounds Testing and DCC-GARCH

The market mood index is a novel sentiment indicator for the Indian stock market, designed to assess the overall mood within the market. This tool purportedly enables investors to become aware of their emotional state and predispositions that may impact their decision-making processes. Given the context, this study aims to explore the relationship between the market mood index and the Indian stock market index in order to verify the effectiveness of the index. The study used data from March 2012 to May 2023. Various analytical techniques are utilised for this purpose, such as unit root tests, cointegration tests, pair-wise Granger causality tests and the DCC-GARCH approach. The results indicate that the Indian stock market and the market mood index are cointegrated in the long term, suggesting a sustained connection between them. Additionally, a feedback mechanism between the variables is apparent. The GARCH analysis confirms the presence of volatility transmission from the market mood index to the Indian stock market in both the long and short term. Furthermore, the DCC model reveals the changing correlation of volatility between the market mood index and the Indian stock market. Trading tactics should be formulated with the association between the two variables in mind. It can be concluded that the studied index, developed by TickerTape, shows good association with the market index suggesting being a good investment indicator.