Asymmetric and temporal effects of investor sentiment and institutional trading behavior on returns and volatility: evidence from the Indian stock market

Purpose This study aims to examine the effect of investor sentiment and institutional trading behavior on stock market returns and volatility in India, emphasizing asymmetric, causal and time-varying dynamics. Design/methodology/approach The study uses daily data from January 2010 to December 2024 and follows a stepwise empirical strategy. Ordinary least squares (OLS) models are employed to assess the impact of investor sentiment on returns and volatility, including asymmetries captured through positive and negative sentiment components. Pairwise Granger causality tests are used to identify directional linkages, while a term structure framework evaluates effects across different horizons. Robustness is ensured using an alternative equity index and exponential generalized autoregressive conditional heteroscedastic (EGARCH)-based volatility measures. Findings The results indicate that investor sentiment significantly affects returns and volatility, with negative sentiment exhibiting greater persistence than positive sentiment. Trading imbalances of both domestic and foreign institutional investors reduce volatility, highlighting their stabilizing roles. Granger causality tests indicate mutual feedback between sentiment and institutional activity, except for a one-way influence from domestic trading to sentiment. Term-structure analysis reveals that these effects weaken across horizons, though the influence of foreign trading remains comparatively more persistent. Practical implications The findings guide regulators in designing risk-sensitive policies and implementing timely interventions, while providing investors with evidence-based strategies for managing sentiment-driven risks. Originality/value This study provides evidence on the asymmetric and temporal effects of investor sentiment and institutional trading behavior in India's equity market, advancing behavioral finance research in emerging economies.