Investor sentiment and stock returns: Global evidence

We assess the impact of investor sentiment on future stock returns in 50 global stock markets. Using the consumer confidence index (CCI) as the sentiment proxy, we document a negative relationship between investor sentiment and future stock returns at the global level. While the separation between developed and emerging markets does not disrupt the negative pattern, investor sentiment has a more instant impact in emerging markets, but a more enduring impact in developed markets. Individual stock markets reveal heterogeneity in the sentiment-return relationship. This heterogeneity can be explained by cross-market differences in culture and institutions, along with intelligence and education, to varying degrees influenced by the extent of individual investor market participation.     

Investor sentiment and stock returns: Wenchuan Earthquake

This paper exploits a natural experiment (the Wenchuan Earthquake in China) to study the effects of investor sentiment on stock returns. We find that during the 12 months following the earthquake, stock returns are significantly lower for firms headquartered nearer the epicenter than for firms further away. Further analyses indicate that this pattern of stock returns does not exist before or long after the earthquake, and cannot be explained by actual economic losses or a change in systematic risk. Overall, our evidence is consistent with the interaction of local bias and investor sentiment affecting stock returns.     

Investor sentiment and the cross-section of stock returns: new theory and evidence

Review of Quantitative Finance and Accounting - Narrative reporting is an important avenue for investors to know more about a company from the eyes of its board of directors. This study aims to...     

Fast profits: Investor sentiment and stock returns during Ramadan

Observed by more than 1.5 billion Muslims, Ramadan is one of the most celebrated religious traditions in the world. We investigate stock returns during Ramadan for 14 predominantly Muslim countries over the years 1989-2007. The results show that stock returns during Ramadan are significantly higher and less volatile than during the rest of the year. No discernible declines in market liquidity are recorded. We find these results consistent with a notion that Ramadan positively affects investor psychology, as it promotes feelings of solidarity and social identity among Muslims world-wide, leading to optimistic beliefs that extend to investment decisions.     

Investor sentiment and stock volatility: New evidence

This study investigates the predictability of sentiment measure on stock realized volatility. We propose a new investor sentiment index (NISI) based on the partial least squares method. This sentiment index outperforms many existing sentiment indicators in three aspects. First, in-sample result shows that the NISI has greater predictive power relative to the others. Most sentiment indicators show predictability in the non-crisis period only while the NISI is also effective in the crisis period. Furthermore, the NISI exhibits more prominent superiority in longer horizons forecasting. Second, further analysis indicates that the NISI has robust predictability before and after the Chinese stock market turbulence periods while the others not. Importantly, the NISI is still effective significantly after considering leverage effect while most of the others not. Finally, out-of-sample analysis demonstrates that the NISI is more powerful than other sentiment measures. This result is reproducible in different robustness checks.     

Investor sentiment and aggregate stock returns: the role of investor attention

Review of Quantitative Finance and Accounting - We build on the intuitive, albeit overlooked, relationship between investor attention and investor sentiment to explore the open question of the...     

Investor recognition and stock returns

It is well established that investment fundamentals, such as earnings and cash flows, can explain only a small proportion of the variation in stock returns. We find that investor recognition of a firm’s stock can explain relatively more of the variation in stock returns. Consistent with Merton’s (J Finance 42(3):483–510, 1987) theoretical analysis, we show that (i) contemporaneous stock returns are positively related to changes in investor recognition, (ii) future stock returns are negatively related to changes in investor recognition, (iii) the above relations are stronger for stocks with greater idiosyncratic risk and (iv) corporate investment and financing activities are both positively related to changes in investor recognition. Our research suggests that investors and managers who are concerned with firm valuation should consider investor recognition in addition to accounting information and related investment fundamentals.     

A careful re-examination of seasonality in international stock markets: Comment on sentiment and stock returns

In questioning Kamstra, Kramer, and Levi’s (2003) finding of an economically and statistically significant seasonal affective disorder (SAD) effect, Kelly and Meschke (2010) make errors of commission and omission. They misrepresent their empirical results, claiming that the SAD effect arises due to a “mechanically induced” effect that is non-existent, labeling the SAD effect a “turn-of-year” effect (when in fact their models and ours separately control for turn-of-year effects), and ignoring coefficient-estimate patterns that strongly support the SAD effect. Our analysis of their data shows, even using their low-power statistical tests, there is significant international evidence supporting the SAD effect. Employing modern, panel/time-series statistical methods strengthens the case dramatically. Additionally, Kelly and Meschke represent the finance, psychology, and medical literatures in misleading ways, describing some findings as opposite to those reported by the researchers themselves, and choosing selective quotes that could easily lead readers to a distorted understanding of these findings.     

Common stock returns,real activity,money, and inflation: Some international evidence

This paper tests whether the negative relationship between real stock returns and inflation in the United States is in fact proxying for a positive relationship between stock returns and real activity variables in six major industrial countries over 1966–1979. Consistent with Fama's ‘proxy-effect’ hypothesis, we document a negative relationship between inflation and real activity and a positive one between real stock returns and real activity variables. Real activity variables dominate money growth rates and expected and unexpected inflation in explaining real stock returns. A puzzling result that still remains is the positive role of money and the negative role of expected inflation in explaining these real stock returns in all major industrial countries.     

Investor flows and stock market returns

This study simultaneously analyzes the relation between aggregate stock market returns and cash flows (net purchases of equity) from a broad array of investor groups in the United States over a long period of time from 1952 to 2004. We find strong evidence that quarterly flows are autocorrelated for each of the different investor groups. We further document a significant and positive contemporaneous relation between stock market returns and flows of Mutual Funds and Foreign Investors.     

Investor sentiment and the near-term stock market

We investigate investor sentiment and its relation to near-term stock market returns. We find that many commonly cited indirect measures of sentiment are related to direct measures (surveys) of investor sentiment. However, past market returns are also an important determinant of sentiment. Although sentiment levels and changes are strongly correlated with contemporaneous market returns, our tests show that sentiment has little predictive power for near-term future stock returns. Finally, our evidence does not support the conventional wisdom that sentiment primarily affects individual investors and small stocks.     

Investor sentiment and the dispersion of stock returns: Evidence based on the social network of investors

This paper extracts an investor sentiment indicator for the 30 DJIA stocks based on the textual classification of 289,024 online tweets posted on the so-called StockTwits, and examines its contemporaneous and predictability effects on the dispersion of stock returns using the quantile regression technique. We find that both contemporaneous and predictability effects of sentiment are heterogeneous throughout the return distribution. Specifically, sentiment is positively contemporaneously associated with stock returns at higher quantiles. However, it is a strong negative predictor of future returns at lower quantiles. Overall, our findings are broadly consistent with most behavioural theories and show that sentiment mainly affects the valuation of assets in extreme market conditions.     

Institutional investor sentiment and aggregate stock returns

This paper examines the equity market return predictability of institutional investor sentiment, in comparison to individual investor sentiment. Our findings suggest that institutional traders are informed and that their sentiment helps to tilt stock prices towards the intrinsic value. This is because the sentiment of institutions encompasses news regarding expectations on future cash flows of underlying firms that impounds itself into future price expectations. In this study, we add to the large number of studies that investigate the role and implications of investor sentiment, which has long been viewed as a pure behavioural phenomenon, on market efficiency and price discovery.     

Alternative profitability measures and cross-section of expected stock returns: international evidence

Review of Quantitative Finance and Accounting - This paper provides an extensive international analysis of the cross-sectional return predictive power of a variety of firm-level profitability...     

Investor sentiment indices based on k-step PLS algorithm: A group of powerful predictors of stock market returns

We construct a group of new investor sentiment indices by applying a new dimension reduction technique called k-step algorithm which adopts partial least squares method recursively. With the purpose of forecasting the aggregate stock market return, the new group of investor sentiment indices performs a greater ability in predicting the market return than existing investor sentiment indices in and out of sample by adequately using the information in residuals and eliminating a common noise component in sentiment proxies. This group of new investor sentiment indices beats five widely used economic variables and still has a strong return predictability after controlling these variables. Moreover, they could also predict cross-sectional stock returns sorted by industry, size, value, and momentum and generate considerable economic value for a mean-variance investor. We find the predictability of this group of investor sentiment indices comes from its forecasting power for discount rates and market illiquidity.     

Investor sentiment and value and growth stock index options

The paper examines the relationship between both individual and institutional investor sentiment measures and the risk-neutral skewness (RNS) of seven stock index options comprising either growth or value stocks. It provides novel evidence that growth index option prices are affected by sentiment measures. The regression results indicate a significantly positive relationship between sentiment measures and the RNS estimated from four growth index options and a negative relationship with two value index options. The results are economically significant since an associated long–short trading strategy yields high abnormal returns with a Sharpe ratio of up to 1.1 and zero exposure to systematic risk. These high abnormal returns provide evidence of a value premium type anomaly in the index options markets.     

Anomalies and stock returns: Australian evidence

Prior research has identified the existence of several cross‐sectional patterns in equity returns, commonly referred to as effects. This paper tests for the existence of a number of well‐known effects using data from the Australian equities market. Specifically, we investigate the size effect, book‐to‐market effect, earnings‐to‐price effect, cashflow‐to‐price effect, leverage effect and the liquidity effect. An additional aim of this paper is to investigate the capability of the Fama–French model in explaining any observed effects. We document a size, book‐to‐market, earnings‐to‐price and cashflow‐to‐price effect but fail to find evidence of a leverage or liquidity effect. Although our findings indicate that the Fama–French model can partially explain some of the observed effects, we conclude that its performance is less than satisfactory in Australia.     

Consumption habit and international stock returns

We use the consumption-based asset pricing model with habit formation to study the predictability and cross-section of returns from the international equity markets. We find that the predictability of returns from many developed countries' equity markets is explained in part by changing prices of risks associated with consumption relative to habit at the world as well as local levels. We also provide an exploratory investigation of the cross-sectional implications of the model under the complete world market integration hypothesis and find that the model performs mildly better than the traditional consumption-based model, the unconditional and conditional world CAPMs and a three-factor international asset pricing model.     

Monetary environments and international stock returns

Previous research documents that US stock returns are related to the US monetary environment. The focus of this paper is to determine whether stock returns in foreign markets are associated with both local and US monetary environments. Consistent with the US market results, we find that foreign stock returns are generally higher in expansive US and local monetary environments than they are in restrictive environments. Further, these higher returns are generally not accompanied by increases in risk. Interestingly, several of the stock markets are more strongly related to the US monetary environment than to local monetary conditions. For seven of the 15 foreign countries examined, the local and US monetary environment explain 4% or more of the variation in monthly stock returns.