Abstract
ABSTRACT The aim of this study is to analyze how economic uncertainty and monetary policy affect investor sentiment in Brazil. Investor sentiment is an important element in the finance, economics, and accounting literature and its impact on financial markets is widely documented. However, understanding the variables that affect it remains an important challenge, and this research seeks to explore this gap within the Brazilian context. The study provides initial evidence regarding the impact of economic uncertainty and monetary policy on investor sentiment in Brazil. The findings documented here provide theoretical, managerial, and social contributions, with a possible impact on the areas of finance, economics, and accounting. Monthly data were used relating to four mechanisms of transmission of economic uncertainty and of monetary policy (interest rate, exchange rate, inflation rate, economic uncertainty index) and to the consumer confidence index as a proxy for investor sentiment (covering the period from January of 2006 to March of 2020). An autoregressive distributed lag model was estimated to capture short- and long-term relationships between the variables. The results indicate that investor sentiment is affected by economic uncertainty and by the main mechanisms of transmission of monetary policy to different extents and in the different time horizons. The evidence suggests that investors, policymakers, and monetary authorities should consider sentiment as a signal, whether for altering investment portfolios or for anticipating economic trends. It also provides support for focusing on economic and monetary policy in the National Financial Education Strategy (Estratégia Nacional de Educação Financeira - ENEF) recently adopted in Brazil
Highlights
Paulo Fernando Marschner & Paulo Sergio CerettaOne of the main topics discussed in finance is the validity of the assumptions made by modern finance theory, in particular the rationality of economic agents
Investor sentiment can be defined as beliefs about the future cash flows and risks associated with investments that cannot be explained by the information available to the investor, and so they are not rationally justifiable (Baker & Wurgler, 2007)
According to some authors (Cohen & Kudryavtsev, 2012; Kurov, 2010; Menkhoff & Rebitzky, 2008; Silvia & Iqbal, 2011; Vuchelen, 2004; Zhang, 2019), economic uncertainties and monetary shocks are transmitted to the stock market via investors’ reactions to economic and monetary news, as this directly affects the risk of stocks and the investor’s risk aversion. This context reinforces the need for new studies that seek to explain Brazilian investor sentiment. Considering this theoretical gap, this research aims to analyze the relationship between the main mechanisms of transmission of economic uncertainty and of monetary policy and investor sentiment in Brazil
Summary
Paulo Fernando Marschner & Paulo Sergio CerettaOne of the main topics discussed in finance is the validity of the assumptions made by modern finance theory, in particular the rationality of economic agents. Rationality is bounded due to restrictions on our capacity to think, the information available, and time (Simon, 1955, 1982) It was based on the seminal work of Kahneman and Tversky (1979) and the numerous subsequent studies (Akerlof & Shiller, 2009; Daniel et al, 1998; De Long et al, 1990; Lee et al, 1991; Shleifer & Summers, 1990) that it has been found that some phenomena are caused by the presence of investors that are, not totally rational, as they trade in accordance with their sentiments. The ability of the behavioral approach to explain phenomena that are not totally elucidated by the conventional theories has motivated the development of many studies within the international arena (Akerlof & Shiller, 2009; Baker & Wurgler, 2006, 2007; Barberis et al, 1998; Brown & Cliff, 2005; Cohen & Kudryavtsev, 2012; Dhaoui & Bacha, 2017; Kumar & Lee, 2006), which have come to establish and consolidate the field of behavioral finance
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