Proxy For Investor Sentiment Research Articles

HETEROGENEITY OF SENTIMENT RISK IN MALAYSIAN STOCK MARKET

Behavioral risks including investor sentiment plays an important roles in Asia’s stock market behaviors but theoretically and empirically not well understood in traditional conditional means statistic partly due to its heterogeneity roles. In contrast to the existing studies, this paper examine the heterogeneity roles of investor sentiment proxies (i.e. CSI, BCS, and FKLI) in influencing various aggregate stock market indices in Malaysia. The proposed sentiment proxies relation to stock returns are statistically analyzed using mean-based (OLS) and quantile based (QR) regression methods to uncover the relationships accross full range of stock market returns conditional distributions. In the analysis, we examine the possible multidimensional association of various conditional of sentiments (i.e. average, sentiment states, market states, and interaction between sentiment and market states) on size (i.e. big firms vs. small firms) and industry (i.e. defensive vs. speculative) segmented data. The OLS analysis does not provides conclusive significant association of sentiment to returns but the QR analysis reveal emerging patterns of sentiment heterogeneity roles. Specifically, the QR analysis reveal an asymmetric association between sentiment to returns with U-curve pattern from negative magnitude in the lower quantiles and positive magnitude in the upper quantiles. The findings not only consistent with the current hypothesis that sentiment risk is strongly affected the small firms and speculative industry but also the big firms. The sentiment-return associations are statistically significant in extreme lower quantiles and in extreme upper quantiles of return distributions. These patterns are consistent with theoretical postulates of prospect theory and evidence of assymetric overreaction of Asia investors to sentiment news. Overall, the findings from this paper provides new insights for theoretical understanding and practical application of sentiment risk in stock market.

Melancholia and Japanese stock returns – 2003 to 2012

Japan's “lost decades” challenge a central tenet of finance, namely a positive relationship between risk and expected return. We present evidence that Japan's dismal returns are a function of sentiment both at the aggregate market and individual firm level. Utilizing a text-based measure of news sentiment (Thomson Reuters News Analytics) to proxy for investor sentiment, we find that sentiment is predominately negative during our sample period (2003 to 2012) and is associated with negative returns. We also find that the effect of news sentiment is greatest for smaller firms.

The Impact of Investor Sentiment on the 'Leverage Effect'

With the advent of the Internet and the availability of user search query data on a broader scale, since the early 2000s researchers have started using collective search query information instead of, or, in addition to, traditional investor sentiment proxies. This study examines whether the leverage (bad news) effect, as measured by the EGARCH (1,1) model, changes with the inclusion of a newly emerging sentiment proxy, internet search volume. The sample consists of 14 US companies belonging to the NASDAQ and NYSE Indices and 501 observations of data collected at weekly frequency spanning a nine year period. Empirical findings suggest that, inclusion of the investor sentiment variable has no clear impact on the bad news effect; there is, however, a discernible increase in volatility persistence. The implications of the findings are that the investor sentiment proxy has additional informational content. Behavioral finance theory and the availability and social proof heuristics serve as potential explanations for such findings.

Investor sentiment and share returns: evidence on family firms

Purpose The purpose of this paper is to examine the effect of investor sentiment on share returns, exploring whether this effect is different for public family and non-family firms. Design/methodology/approach The author uses the European Economic Sentiment Indicator data, from Directorate General for Economic and Financial Affairs as a proxy for investor sentiment and focused on the share returns of family and non-family firms, using panel data methodology. Findings Using data from listed family and non-family firms for the period between 1999 and 2011, in accordance with behavioural finance theory, the results indicate that there is a negative relationship between sentiment and share returns. In addition, the author found no difference between family and non-family firms in what concerns the effect of sentiment on share returns. The evidence also suggests that young, large and medium growth firms are most affected by sentiment. Finally, the results suggest that the evidence concerning the relationship between sentiment and returns is sensitive to the proxy used to measure the sentiment. Research limitations/implications A limitation of this study is the small size of the sample, which is due to the small size of the Portuguese stock market, the Euronext Lisbon. Originality/value This paper offers some insights into the effect of investor sentiment on the share returns in the context of public family firms, a strand of finance that is scarcely developed. It also contributes to the analysis of a small European country, with a high concentration of equity ownership.

International Sentiment Spillovers in Equity Returns

AbstractThis paper examines the extent of spillovers from US investor sentiment on G7 aggregate market, value and growth stock returns. As a proxy for investor sentiment, we include individual investor survey, measured by the University of Michigan consumer confidence index and market sentiment measured by Baker and Wurgler composite sentiment index. Using monthly data for the period January 1991 to December 2013, our results indicate the presence of significant spillover effects of US investor sentiment on G7 stock returns. Our findings from generalized impulse response functions show that aggregate market and growth stocks of all non‐US G7 countries are significantly affected by the propagation of the US market sentiment. The financial crisis of 2007 has played a significant role in affecting value stock returns in these countries. Our findings further reveal that both the rational and irrational components of the US individual investor sentiment do not play any significant role in affecting international stock returns. Copyright © 2016 John Wiley & Sons, Ltd.

The Roles of Investor Sentiment in Malaysian Stock Market

The objective of this work is to offer an alternative theoretical perspective and modelling of local investor sentiment proxies in Malaysian stock market. In the theoretical part, two alternative theoretical perspectives in understanding sentiment are introduced, namely, the cognitive-affective theory of mind from neuroscience and the ABC model of the cognitive psychology. In modelling, we identify a combination of survey-based and market-based investor sentiment proxies, namely, the consumer sentiment index, the business condition index, and the stock futures index. The validity of the theory and model is then falsified with empirical analysis by examining the long- and short-run as well as stability relationships of the sentiment proxies on the aggregate stock market index returns using suitable econometric methods. The findings revealed that the proposed sentiment proxies are statistically significant in relations to the stock market returns in the long- and short-run with varying degree of persistency. However, the relations are not homogeneous across different size, industry groups, and market states which are in line with the existing behavioural finance views. In summary, this paper provides a new theoretical insights and empirical evidence on the roles of sentiment in Malaysian stock market that offers valuable academic, practical and policy implications. Classification-JEL:

The Impact of Investor Sentiment on Risk Neutral Skewness: Around Financial Crisis

We examine the relation between investor sentiment proxies and the risk neutral skewness of S&P 500 index option. The risk neutral skewness is estimated by the method of Bakshi, Kapadia and Madan (2003), which is non-parametric method, and the interpolation-extrapolation method and trapezoidal rule is used. We use four sentiment proxies: Michigan Consumer Sentiment Index, non-commercial trader's net position of S&P 500 futures market, Baker and Wurgler (2006)'s sentiment index, and bull-bear survey of American Association of Individual Investors. We firstly conduct the regression to find the general relations of two variables, and then examine the lead-lag relation between investor sentiment proxies and risk neutral skewness through VAR analysis. Contrary to the previous studies, we observe that sentiment proxies show different signs by the economic conditions. Overall, the sentiment proxies explain the three-dimension moment better in the crisis in U.S, and especially non-commercial trader's net position of S&P 500 futures market explains bet among the proxies.

Another explanation of the mutual fund fee puzzle

This paper demonstrates that investor sentiment explains the recent puzzle of the negative relation between fees and before-fee performance of equity mutual funds. Using a composite proxy for investor sentiment, the puzzle can be explained stronger by investor sentiment, compared to the strategic fee-setting explanation discussed in the literature. More-sentiment driven investors would like to select more skilled fund managers, leading to a better future performance in short run. Additionally, when sentiment is high (low), it results in lower (higher) fees. Our results highlight the use of investor sentiment approach in determining mutual fund fees and performance.

A nonlinear Granger causality test between stock returns and investor sentiment for Chinese stock market: a wavelet-based approach

ABSTRACTIn this article, we re-examine the causality between the stock returns and investor sentiment in China. The number of net added accounts is used as a proxy for investor sentiment. To mimic the different investment horizons of market participants, we use the wavelet method to decompose stock returns and investor sentiment into time series with different frequencies. Additionally, we test for nonlinear causal relationships based on Taylor series approximation. Our results indicate that there is a one-directional linear causality from stock returns to investor sentiment on the original series, while there is a strong bi-directional nonlinear causality between stock returns and investor sentiment at different timescales.

Investor sentiment, stock mispricing, and long-term growth expectations

I analyze whether or not market-wide investor sentiment induces stock mispricing, by affecting the boldness of predictions of firms’ long-term earnings growth. I predict that bullish market-wide sentiment induces investors to aggressively separate firms with high growth futures from others, and that this excessive boldness results in a high level of mispricing. Consistent with my prediction, I observe an excessively large dispersion in consensus growth forecasts when proxies for investor sentiment are high at the beginning of the period. Furthermore, stocks with higher-predicted growth experience more negative forecast revisions and lower subsequent stock returns, especially following periods of high investor sentiment.

Market-Wide Investor Sentiment, Growth Forecasts, and Cross-Sectional Stock Returns

I analyze whether or not market-wide investor sentiment induces stock mispricing, by affecting the boldness of predictions of firms’ long-term earnings growth. I predict that bullish market-wide sentiment induces investors to aggressively separate firms with high growth futures from others, and that this excessive boldness results in a high level of mispricing. Consistent with my prediction, I observe an excessively large dispersion in consensus growth forecasts when proxies for investor sentiment are high at the beginning of the period. Furthermore, stocks with higher-predicted growth experience more negative forecast revisions and lower subsequent stock returns, especially following periods of high investor sentiment.

Improving Return Predictability Using Variance-of-Variance Premiums

This paper reports that the variance-of-variance premium (VVP), the difference between the risk-neutral and physical measures of variance-of-variance, has strong predictability for stock returns, especially at very short horizons. Furthermore, pooling both information on the VVP and the variance premium (VP) can deliver a large amount of statistical and economic gain compared to using either of them alone. These results corroborate the finding of Bollerslev, Tauchen, and Zhou (2009) that volatility-of-volatility risk is a critical driver of time-varying risk premiums. Finally, the results hold in the international stock markets and are robust to traditional predictors, investor sentiment proxies, and funding constraints.

Investor Sentiment, Anomalies, and the Macroeconomy

This paper examines whether the results supporting a recent story that sentiment-related overpricing is the source of a variety of asset pricing anomalies are still maintained after separating out the effect of macroeconomic conditions. We find that after adjusting for the effect of several macroeconomic variables in the proxy for investor sentiment, the results are no longer consistent with the sentiment-related overpricing story. These results indicate that the anomalies are not necessarily attributed to sentiment-related overpricing but rather to macroeconomic conditions.

Forecasting of housing stock returns and housing prices

Purpose– The purpose of this paper is to create an endurance index of housing investor sentiment and use it to forecast housing stock returns. This study performs not only in-sample and out-of-sample forecasting, like many previous studies did, but also a true forecasting by using all lag terms of independent variables. In addition, an evaluation procedure is applied to quantify the quality of forecasts.Design/methodology/approach– Using a binomial probability distribution model, this paper creates an endurance index of housing investor sentiment. The index reflects the probability of the high or low stock price being the close price for the Philadelphia Stock Exchange Housing Sector Index. This housing investor sentiment endurance index directly uses housing stock price differentials to measure housing investor reactions to all relevant news. Empirical results in this study suggest that the index can not only play a significant role in explaining variations in housing stock returns but also have decent forecasting ability.Findings– Results of this study reveal the considerable forecasting ability of the index. Monthly forecasts of housing stock returns have an overall accuracy of 51 per cent, while the overall accuracy of 8-quarter rolling forecasts even reaches 84 per cent. In addition, the index has decent forecasting ability on changes in housing prices as suggested by the strong evidence of one-direction causal relations running from the endurance index to housing prices. However, extreme volatility of housing stock returns may impair the forecasting quality.Practical implications– The endurance index of housing investor sentiment is easy to construct and use for forecasting housing stock returns. The demonstrated predictability of the index on housing stock returns in this study can have broad implications on housing-related business practices through providing an effective forecasting tool to investors and analysts of housing stocks, as well as housing policy-makers.Originality/value– Despite different investor sentiment proxies suggested in the previous studies, few of them can effectively predict stock returns, due to some embedded limitations. Many increases and decreases inn prices cancel out each other during the trading day, as many unreliable sentiments cancel out each other. This dynamic process reveals not only investor sentiment but also resilience or endurance of sentiment. It is only long-lasting resilient sentiment that can be built in the closing price. It means that the only feasible way to use investor sentiment contained in stock prices to forecast future stock prices is to detach resilient investor sentiment from stock prices and construct an index of endurance of investor sentiment.

A new proxy for investor sentiment: evidence from an emerging market

This study proposes order imbalance as a proxy for investor (market) sentiment. Using daily data from Amman Stock Exchange over the period (20042013), we find that the daily aggregate order imbalance measures and specifically the value of buyer-initiated shares less the value of seller initiated shares serves as an excellent proxy for investor sentiment. Thus, it shows a highly significant effect on the daily aggregate market returns even after controlling for the effects of lagged market returns and liquidity. Order imbalance proxies convey more information about market returns than trading activity measures. The Granger causality tests illustrate a bi-directional causality between investor sentiment and aggregate market returns.

The impacts of investor sentiment on different economic sectors: Evidence from Istanbul Stock Exchange

The aim of this study is to construct a model for evaluating the effects of investor sentiment on the conditional volatility by measuring the effects of noise trader demand shocks on returns and volatility where EGARCH model is used to determine whether investor sentiment has more influence on the conditional volatility of various sector indexes. After controlling for macroeconomic shocks, weekly trading volume of Istanbul Stock Exchange 100 is used as investor sentiment proxy. Significant evidence is found that a change in investor sentiment has more influence on conditional volatility of industry, banking, and food and beverages sector indexes when compared with other sectors such as retail or telecommunication.

Price Band, Offer Price Adjustment and Initial Listing Returns: Evidence from the Indian IPO Market

Extant research on developed markets shows that investor sentiment plays a prominent role in IPO markets. There is sparse work in the context of emerging markets. We fill this lacuna by studying the Indian IPO market. We examine the determinants of offer price band and its influence on offer price adjustment and subsequent listing performance. Offer price band is a crucial component of the book building process and has not been studied in the context of emerging markets. Our work fills this void. We hypothesise that retail demand which is a proxy for investor sentiment will positively influence offer price band. We also posit that the profitability of a firm will be inversely related to offer price band. Our empirical tests support these hypotheses. We also find that offer price adjustment is positively related to offer price band.

An examination of investor sentiment effect on G7 stock market returns

This paper examines the relationship between investor sentiment and G7 stock market returns. Using a range of investor sentiment proxies, including investor survey, equity fund flow, closed-end equity fund (CEEF) discount and equity put–call ratio, we examine if investor sentiment has a significant influence on value and growth stock returns as well as aggregate market returns. Using monthly data for the period January 1995–December 2007, our results depict a negative relationship between investor sentiment and future returns. We find results that are consistent with previous studies in that when investor sentiment is high (low), future returns are low (high). Our panel results display evidence of commonality across all the sentiment measures with the value stocks having a particularly strong effect relative to growth stocks. Furthermore, the effect of survey sentiment on future returns gradually decreases beyond the one-month forecast horizon. We observe evidence of price pressure on value stocks and the overall market due to increases in concurrent equity fund flow. Finally, the discount of CEEFs is also found to proxy for investor sentiment, with a narrower discount being associated with an increase (decrease) in value (growth) stocks.

The effect of US individual investor sentiment on industry‐specific stock returns and volatility

PurposeThis paper examines the effect of rational and irrational investor sentiment on the stock return and volatility of US auto, finance, food, oil and utility industries.Design/methodology/approachThe American Association of Individual Investors Index (AAII) is used as a proxy for US individual investor sentiment. The US market fundamentals are regressed on investor sentiment in order to capture the effect of macroeconomic risk factors on investor sentiment. Then impulse response functions (IRFs) are generated from a VAR model to investigate the effect of unanticipated movements in US investor sentiment on both industry‐specific stock return and volatility.FindingsThe results show a significant impact of investor sentiment on stock return and volatility in all the industries. We find that the positive rational component of US individual investor sentiment tends to increase the stock return in these industries. We also document that unanticipated increase in the rational component of US individual investor sentiment has a significant negative impact only on the industry volatilities of US auto and finance industries.Research limitations/implicationsThe results are based only on the 1999 – 2010 US industry‐specific stock return and volatility data and are confined to these industries.Practical implicationsThe findings of this paper can help investors to improve their asset return generating models by incorporating investor sentiment. The findings can also help policymakers to design policies that stabilize sentiment and reduce volatility and uncertainty in the stock markets.Originality/valueThis paper adds to the growing literature on behavioral finance by filling a gap and addressing the impact of investor sentiment in the various US industries.

Does Investor Sentiment Affect Earnings Management?

AbstractI hypothesize and find that earnings management via accruals is driven partially by the prevailing market‐wide investor sentiment. Managers inflate earnings in periods of higher sentiment, but report more conservatively during periods of low sentiment. Moreover, the likelihood of income‐increasing earnings management to avoid negative earnings surprises is also positively associated with investor sentiment. These results are robust to: (i) controls for time‐varying firm characteristics such as growth, investment opportunity sets, future profitability, leverage and size; (ii) macroeconomic variables such as future inflation, GDP growth, and growth in industrial production; (iii) multiple proxies for investor sentiment; and (iv) discretionary revenues as alternative measure of earnings management. Cross‐sectional analyses reveal that firms whose stock returns co‐move more with investor sentiment are more (less) likely to manage earnings upward via abnormal accruals in quarters of higher (lower) sentiment. The findings of managers’ strategic use of abnormal accruals show the need for increased attention from boards of directors, auditors and regulators to heightened managerial incentives to overstate earnings and to report optimistic earnings numbers during periods of high investor sentiment.