Abstract
This research studies the effect of stock-level investor sentiment on individual stock returns’ mean-variance relation. Using unique buy and sell volume data of retail investors in Korean stock market, we find that a positive mean-variance relation is undermined among high-sentiment stocks, but holds among low-sentiment stocks. We adopt buy-sell imbalances of retail investors for individual stocks as a measure of stock-level investor sentiment. Further, our findings provide empirical evidence of a strong riskreturn trade-off among stocks with low retail concentration (e.g., large capitalization, high-priced, and growth stocks). Existing research only analyzes market-wide investor sentiment. However, we study the effect of stock-level investor sentiment on individual stock returns. Therefore, our findings suggest novel implications about the investment strategy that the stock-level investor sentiment is important when constructing portfolios based on variance.
Highlights
Many researchers and practitioners have shown interest in investor sentiment (ISENT). Baker and Wurgler (2006, 2007) study the direct effect of market-wide ISENT on future stock returns1. Massa and Yadav (2015) further show that the investor sentiment affects the strategy and performance of mutual funds
ISENT plays an important role in determining future stock returns when individual investors participate in stocks aggressively
We find that a negative mean-variance relation (MVR) is observed only among high-sentiment stocks
Summary
Many researchers and practitioners have shown interest in investor sentiment (ISENT). Baker and Wurgler (2006, 2007) study the direct effect of market-wide ISENT on future stock returns1. Massa and Yadav (2015) further show that the investor sentiment affects the strategy and performance of mutual funds. As Kumar and Lee (2006) describe, U.S data on BSI are very rare and available only for short time periods They do not cover all retail investors in the U.S we collect buy and sell trading data of all listed companies in the Korean stock market for a sufficiently long period, from 2000 to 2014. These unique and valuable buy and sell trading data allow us to investigate the effect of stocklevel ISENT on individual stock prices.
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