The Mediating Effect of Trading Volume on the Relationship between Investor Sentiment and the Return of Tech Companies

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Abstract
This paper investigates the mediation effect of trading volume to explore the relationship between investor sentiment, measured as a volatility forecast (VIX), and the return of tech companies based on the mediation analysis. This paper focuses on Tesla, a list of the 30 largest technology companies and the MSCI World Index. It implements this mediation analysis by using an ARMA-EGARCH model for the time series of Tesla stock and the MSCI World Index returns and a Fixed-Effects regression model for stock returns of the list of 30 technology companies. Estimation results show that trading volume mediates the relationship between investor sentiment and stock returns. The mediating effect found in the case of Tesla and the MSCI World Index is much more present than regarding the list of companies. Furthermore, to obtain an all-encompassing analysis and create less dependence on proxy selection, additional mediation analyses are incorporated that include the 10-year Treasury yields, prices of the Swiss franc currency and the Baker-Wurgler index as investor sentiment proxies. The results show that the mediating effect of the trading volume is present also for these proxies providing more evidence that such a mediating effect is the underlying mechanism in stock markets.

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