Abstract
Investor sentiment is an important aspect of behavioural finance, which provides explanation of anomalies to the asset’s intrinsic values. Sentiments can easily affect individual investors. Historically, Australia is regarded as rich in resources but poor in capital, and this motivates the paper to further study and compare the effects of investor sentiment on performance returns. Aggregate and cross-sectional effects, as well as predictive regression analysis to forecast the relationships, while controlling for the macroeconomic variables, are used by employing Consumer Confidence Index (CCI) and trade volume as sentiment proxies. Contrary to some studies with aggregate stock markets, it is discovered that in the short term, investor sentiment poses a positive impact with strong predictive power on the forecast of portfolio returns but not so much in the long run, which supports the classical theories of rational investors. In both Australian and New Zealand markets, the sentiment proxies also cannot predict the returns portfolios with dividends in the long/short portfolio and book-to-market ratio long/short portfolio.
Highlights
In the financial field, factors which could influence companies’ asset prices or share returns inspire many research works to be conducted, but results remain inconclusive
The Augmented Dickey Fuller (ADF) and KPSS test results show that the raw sentiment data are all consistent except for trade volume in New Zealand (NZ)
The only relatively high and positive correlation is between GDP and trade volume for both countries
Summary
Factors which could influence companies’ asset prices or share returns inspire many research works to be conducted, but results remain inconclusive. Macroeconomic variables and financial ratios such as the DPS (dividend per share) ratio, the book-to-market ratio, and the PE (price earning) ratio could be used to forecast share return. These components can only predict returns through traditional economic settings. It is even argued lately that behavioural aspects, such as investors sentiment, are imperative towards the success of an organisation. This paper endeavours to add to this growing body of knowledge by using investor sentiment to explain the portfolio returns or performance of equity and apply a simple stylish investment behavioural approach in a macroeconomic setting within these Australasian countries. Economic historians concede to the fact that Australia is regarded as a resource-rich country but capital-poor nation; there are demands for more efforts to improve this image through further internal and external investment strategies
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