Utilising an <i>R</i> 2-decomposed linkage method to investigate a contemporaneous and lead connection between the stock market and the investor sentiment index in Vietnam

Purpose We are the first to develop the investor sentiment indicator in order to evaluate the level of volatility in the Vietnamese stock market. We then identify connections, specifically differentiating between lagged linkages and contemporaneous connections between investor sentiment and the stock marketplace. Design/methodology/approach Our analysis uses the R2-decomposed linkage methodology to identify connections, specifically differentiating between lagged and contemporaneous linkages. The return transmission mechanism between the Investor Sentiment Index (SI), FPT Corporation (FPT), Hoa Phat Group JSC (HPG), Lam Dong Pharmaceutical JSC (LDP), Gemadept Corp (GMD), Ducgiang Chemicals &amp; Detergent Powder Joint Co (DGC) and Danang Airport Services JSC (MAS) is examined using the above novel method. Our analysis covered January 1, 2017, to February 1, 2024. Findings Lagged linkage exhibits a significantly more pronounced influence, particularly on investor sentiment. The role of the net shock receiver is prominently evident during the final three-quarters of 2019, the final three-quarters of 2020 and towards the conclusion of the observed period. Conversely, the opposite role is observed during the remaining periods. The stock market reached its peak during the COVID-19 epidemic, fostering optimistic confidence among investors. However, during the recessionary phase of 2022–2023, while blue-chip stocks remained relatively unaffected by investors' pessimism, mid-cap and high-risk groups exerted an adverse effect on investor sentiment. The empirical analysis also reveals temporal heterogeneity in the net spillover roles of the examined equities, characterised by distinct regime shifts where entities such as DGC and MAS transitioned from shock receivers to transmitters, while FPT and HPG displayed complex, model-dependent connectivity patterns. Furthermore, the interaction with investor sentiment exhibits a structural evolution, wherein major equities largely drove sentiment during the COVID-19 expansion (2020–2021) but became susceptible to market mood during the 2022–2023 downturn, highlighting a divergence where blue-chip assets remained insulated from negative sentiment relative to mid-cap and high-risk segments. Originality/value We investigate a unique chance to explore investor confidence as well as stock market performance in extreme conditions. This paper proposed an R2 decomposed linkage method to evaluate the instability interdependence of several kinds of markets. Our article also marks the pioneer of exploring the influences of unforeseeable occurrences, namely the COVID-19 pandemic and the Russia–Ukraine war, on the interconnection of instability in the stock market's volatility and investor emotion.