Investor Sentiment and Market Volatility Across Quantiles: Evidence from Vietnam

This study examines the role of investor sentiment in asset pricing within a frontier market, focusing on Vietnam. Using a comprehensive dataset covering the period 2015–2025 with 4018 observations, sentiment indices are constructed from both market-based and survey-based indicators. The study employs a quantile causality approach and a Quantile Vector Autoregression (QVAR) model to capture nonlinear, asymmetric, and state-dependent relationships among investor sentiment, stock returns, and market volatility. The empirical results provide several important findings. First, investor sentiment significantly influences stock returns, with stronger effects observed at extreme quantiles corresponding to bearish and bullish market conditions. Second, the impact is heterogeneous across firm sizes, with small-cap stocks exhibiting greater sensitivity to sentiment fluctuations. Third, the impact of investor sentiment on volatility is proxy-dependent and state-dependent. The market-based sentiment measure is generally associated with lower volatility at middle and upper quantiles, whereas the survey-based sentiment proxy shows stronger effects at lower quantiles, particularly during distress periods. Finally, robust bidirectional causality is identified between sentiment and market variables, suggesting the presence of feedback mechanisms between investor behavior and market performance. These findings highlight the importance of behavioral factors in shaping market dynamics in frontier markets characterized by high retail participation and limits to arbitrage. The study contributes to the literature by providing new quantile-based evidence on the nonlinear and asymmetric effects of investor sentiment in Vietnam.