Cross-Country Variation in Price Volatility-Sentiment Relationship and Country Factors

ABSTRACT: This study examines the cross-country variation in the relationship between investor sentiment and price volatility, investigating how cultural, institutional, and economic factors moderate this dynamic. Utilizing a novel firm-level sentiment index constructed via principal component analysis (PCA) of behavioral indicators (RSI, PSY, adjusted turnover, and trading volume), I employ a Vector Autoregression (VAR) framework to analyze data from 28 countries (2007–2022). Results reveal that sentiment-driven volatility is heterogeneous across markets, with short-term overreactions followed by corrections. Power distance (PDI) exacerbates volatility, while education, legal protections, and short-selling attenuate it, highlighting the role of institutional quality in mitigating behavioral biases. The study contributes by integrating cultural dimensions with market microstructure theory, offering nuanced insights into how national contexts shape investor behavior.