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: Some international evidence

We examine whether consumer confidence – as a proxy for individual investor sentiment – affects expected stock returns internationally in 18 industrialized countries. In line with recent evidence for the U.S., we find that sentiment negatively forecasts aggregate stock market returns on average across countries. When sentiment is high, future stock returns tend to be lower and vice versa. This relation also holds for returns of value stocks, growth stocks, small stocks, and for different forecasting horizons. Finally, we employ a cross-sectional perspective and provide evidence that the impact of sentiment on stock returns is higher for countries which have less market integrity and which are culturally more prone to herd-like behavior and overreaction.     

Investor sentiment and return predictability of disagreement

This study examines the influence of investor sentiment on the relationship between disagreement among investors and future stock market returns. We find that the relationship between disagreement and future stock market returns time-varies with the degree of investor sentiment. Higher disagreement among investors’ opinions predicts significantly lower future stock market returns during high-sentiment periods, but it has no significant effect on future stock market returns during low-sentiment periods. Our findings imply that investor sentiment is related to several causes of short-sale impediments suggested in the previous literature on investor sentiment, and that the stock return predictability of disagreement is driven by investor sentiment. We demonstrate that investor sentiment has a significant impact on the stock market return predictability of disagreement through in-sample and out-of-sample analyses. In addition, the profitability of our suggested trading strategy exploiting disagreement and investor sentiment level confirms the economic significance of incorporating investor sentiment into the relationship between disagreement among investors and future stock market returns.     

The holiday and Yom Kippur War sentiment effects: the Tel Aviv Stock Exchange (TASE)

Several empirical studies reveal that holidays generally create positive sentiment in the stock market, whereas negative events, such as wars or disasters, are accompanied by negative sentiment. However, what happens if a negative event occurs on a holiday? In such a case, we expect two conflicting sentiment effects, which may cancel one another out or, alternatively, one effect may dominate the other. The stock market in Israel provides a unique laboratory in which to test these two conflicting effects, as Israel faced a horrible war on the Yom Kippur holiday in 1973—a war whose influence is still strongly felt today. Indeed, we find two robust effects: A strong and significant positive holiday sentiment effect; and a negative war sentiment effect, which dominates the positive holiday effect. These results, which show how sentiment effects are created, are general and can easily be applied to other events and other markets when conflicting sentiment effects occur.     

Developed markets’ business cycle dynamics and time-variation in emerging markets’ asset returns

This paper empirically studies the predictability of emerging markets’ stock returns by business cycle variables and the role of developed markets’ business cycle dynamics in this respect. The evidence shows that the link between business cycles and future stock market returns among emerging markets is considerably weaker than among developed markets. By contrast, I find strong evidence of stock return predictability by the respective country’s dividend-price ratio. This latter finding could reflect that variation in dividend-price ratios potentially reflects both the temporary impact of “hot money” inflows on emerging markets’ asset prices and rational expectations of future returns.     

Managerial sentiment,consumer confidence and sector returns

This paper investigates the relationship between managerial sentiment and sector returns. Using UK monthly data from January 1985 to December 2014 and a sample of consumer and business confidence indicators provided by the European Commission, we provide novel evidence on how managerial and consumer sentiment indicators affect stock returns. We find no support for consumer confidence as a predictor of stock returns. However, managerial sentiment shows a significant impact on aggregate market and sector return indices. Furthermore, we find that parameter estimates for sector groupings are not consistent, implying that the sentiment-return relationship differs across sectors. We also find parameters are sensitive to industry characteristics. Importantly, the overall sentiment-return relationship is dominated by sentiment associated with manufacturing firms.     

The pricing of sentiment risk in European stock markets

This paper studies whether sentiment is rewarded with a significant risk premium in the European stock markets. We examine several sentiment proxies and identify the Economic Sentiment Indicator from the EU Commission as the most relevant sentiment proxy for our sample. The analysis is performed for the contemporaneous excess returns of EA-11 stock markets in the period from February 1999 to September 2015. We apply a conditional multi-beta pricing model in order to track the variation of the sentiment risk premium over time. The results demonstrate a positive significant relationship between sentiment and contemporaneous excess returns which is consistent with previous studies. The calculated sentiment risk premium is significant as well but negative implying that an investment in EA-11 countries over the examined time period – that is bearing sentiment risk – would have been unattractive to the investors on average.     

投资者情绪对我国股市行业收益率的动态影响作用——基于固定效应广义最小二乘法的研究

本文使用2005--2011年我国股市行业收益率数据并构造投资者情绪指标,利用VAR格兰杰因果检验和固定效应广义最小二乘法分析投资者情绪对我国股市的动态影响。实证结果发现,2005--2011年的两次股票市场大幅度涨跌中,我国投资者情绪和股票收益率存在双向因果关系;投资者情绪在3个月内会对股票收益率有正面的影响,此后12个月内其正向影响作用出现了明显的负向反转,其中具有较高账面市值比和占有较高经济地位的交通运输业、信息技术业和制造业等国家基础行业容易受到投资者乐观情绪的影响而出现大幅度涨跌。     

Investor Sentiment Influence on the Risk-Reward Relation in the Taiwan Stock Market

We examine the influence of investor sentiment on the risk-reward relationship in the Taiwan stock market. Regression results show that the risk-reward relationship is weakly positive (significantly negative) under low (high) levels of investor sentiment. Granger causality tests indicate unidirectional, not bidirectional, causal relationships. Moreover, the negative return-variance relationship is more strongly characteristic of the over-the-counter index than of the Taiwan Stock Exchange weighted index, indicating that an unreasonable risk-reward trade-off may be more prevalent in emerging markets than in mature markets. Finally, the Wald test demonstrates that industry effects on the risk-reward relationship may be negligible.     

Consumer confidence and stock returns over market fluctuations

This paper investigates the link between consumer confidence and stock returns over stock market fluctuations. In particular, I focus on whether the returns have asymmetric effects on confidence. The empirical results from both in-sample and out-of-sample tests provide strong evidence of the existence of an asymmetric linkage between stock returns and consumer confidence: the impacts of returns on confidence are larger in bear markets. Moreover, variables such as the term structure, changes in federal fund rates, changes in unemployment rates, and changes in world oil prices are found to be negatively associated with consumer confidence, as expected.     

Global,local, and contagious investor sentiment

We construct investor sentiment indices for six major stock markets and decompose them into one global and six local indices. In a validation test, we find that relative sentiment is correlated with the relative prices of dual-listed companies. Global sentiment is a contrarian predictor of country-level returns. Both global and local sentiment are contrarian predictors of the time-series of cross-sectional returns within markets: When sentiment is high, future returns are low on relatively difficult to arbitrage and difficult to value stocks. Private capital flows appear to be one mechanism by which sentiment spreads across markets and forms global sentiment.     

Returns and volatilities of energy futures markets: Roles of speculative and hedging sentiments

This study examines how speculative and hedging sentiments influence the returns and volatilities of energy futures markets. We construct speculative and hedging sentiment indices based on the weekly data of fund and commercial positions of four energy futures: crude oil, heating oil, gasoline, and natural gas, traded on the New York Mercantile Exchange (NYMEX) from 15 January 2013 to 5 February 2019. Our study demonstrates that speculative sentiment generates greater market fluctuations in the energy futures markets than hedging sentiment; and, further, speculative sentiment stimulates a reversal effect on the returns of crude oil futures. Moreover, speculative sentiment exerts positive systemic risk compensation on the four futures' returns, whereas hedging sentiment alleviates volatilities in the energy futures markets. Most notably, distinguishing it from the leverage effect in stock markets, the speculative sentiment in the energy futures markets is influenced more by good than by bad news; while hedging sentiment exhibits emotional neutrality, as opposed to its impact on stock markets as reported in the literature. Additionally, the positive hedging sentiment in crude oil futures demonstrates significant systemic risk compensation, whereas the three other futures do not have an influence, confirming the prevalence of speculation in hedging transactions in crude oil futures. Our further analysis shows cross-market volatility spillover effects, among which speculative sentiment inherent in crude oil futures causes volatility spillovers to the three other futures, while hedging sentiment has no such effect. Our study has implications for overseeing international energy futures markets, providing regulators with evidence that will facilitate the development of effective strategies to strengthen market supervision.     

融资融券视阈下的投资者情绪与A股收益率波动研究

本文以融资融券市场作为研究目标分析投资者的获利倾向、心理状态、行为决策等因素所反映出的投资者情绪特征对A股收益率波动的影响。采用CR I T I C赋权法,通过计算融资融券中融资余额、融券余额、融资融券交易占比以及融资买入量等多个数据指标构建融资融券投资者情绪指数CRISI。结合A股市场日交易数据,分析研究了融资融券市场中投资者情绪指数和股市收益率波动的相互作用。本文实证结果表明,融资融券投资者情绪指数对A股市场收益率存在正向作用,而A股市场收益率对投资者情绪的影响并不显著。此外,A股市场中股价的“异常涨跌”亦对投资者情绪影响不明显。实证结果反映出我国融资融券市场中投资者情绪与A股市场收益率之间存在一种单向的影响关系,为我国股票市场投资者情绪调查机制与监控系统的建立和完善提供了依据。     

The short of it: Investor sentiment and anomalies

This study explores the role of investor sentiment in a broad set of anomalies in cross-sectional stock returns. We consider a setting in which the presence of market-wide sentiment is combined with the argument that overpricing should be more prevalent than underpricing, due to short-sale impediments. Long-short strategies that exploit the anomalies exhibit profits consistent with this setting. First, each anomaly is stronger (its long-short strategy is more profitable) following high levels of sentiment. Second, the short leg of each strategy is more profitable following high sentiment. Finally, sentiment exhibits no relation to returns on the long legs of the strategies.     

Acquirers’ earnings management ahead of stock-for-stock bids in ‘hot’ and ‘cold’ markets

The accounting literature has found evidence that acquirers in stock-for-stock M&A have typically managed earnings upwards ahead of a bid. Other literatures have concluded that, when stock prices are high and rising, M&A is higher, more M&A is financed with stock, market sentiment and stockholders’ perceptions of information appear to change, and in these circumstances new (arbitrage) motivations for M&A emerge. This paper revisits earnings management ahead of M&A in the light of these findings, comparing experience in ‘hot’ and ‘cold’ markets. It finds that such earnings management is more pronounced in hot markets; that only in such markets are positive discretionary accruals commonly associated with positive abnormal returns on the announcement of earnings; and that in such markets – against the expectations from signalling theory – these positive returns are not reversed on announcement of a stock-for-stock bid. The results suggest that the economic benefits achieved by engaging in earnings management during hot markets are indeed significant: in hot markets, we estimate that on average share acquirers engage in working capital accrual management equivalent to over a third of the average acquirer’s return on total assets in that year; and that this earnings management is associated with increases in market value which are statistically and economically significant, enabling the bidder to secure control of the target with fewer shares.     

Integration of emerging stock markets with global stock markets

Financial integration for emerging economies should be seen as a long-term objective. In this paper, we examine stock market integration among five selected emerging stock markets (Brazil, China, Mexico, Russia and Turkey) and developed markets of the US, UK and Germany. The bounds testing approach to cointegration and error-correction modeling are used on monthly data from January 2001 to December 2014 to determine the short-run and long-run relationship between emerging stock market returns and the returns of the developed stock markets. The results show evidence of the existence of short-run integration among stock markets in emerging countries and the developed markets. However, the long-run coefficients for stock market returns in all emerging countries show a significant relationship only with Germany stock market return. The empirical findings in this study have important implications for academicians, international investors, and policymakers in emerging markets.     

How Does Investor Sentiment Affect Stock Market Crises? Evidence from Panel Data

We test the impact of investor sentiment on a panel of international stock markets. Specifically, we examine the influence of investor sentiment on the probability of stock market crises. We find that investor sentiment increases the probability of occurrence of stock market crises within a one‐year horizon. The impact of investor sentiment on stock markets is more pronounced in countries that are culturally more prone to herd‐like behavior, overreaction and low institutional involvement.     

The Effect of US Stock Market Uncertainty on Emerging Market Returns

We investigate the effects of US stock market uncertainty (VIX) on the stock returns in Latin America and aggregate emerging markets before, during, and after the financial crisis. We find that increases in VIX lead to significant immediate and delayed declines in emerging market returns in all periods. However, changes in VIX explained a greater percentage of changes in emerging market returns during the financial crisis than in other periods. The higher US stock market uncertainty exerts a much stronger depressing effect on emerging market returns than their own-lagged and regional returns. Our risk transmission model suggests that a heightened US stock market uncertainty lowers emerging market returns by both reducing the mean returns and raising the variance of returns. The VIX fears raise the volatility of emerging market returns through generalized autoregressive conditional heteroskedasticity (GARCH)-type volatility transmission processes.     

Lack of consumer confidence and stock returns

This paper investigates the link between the lack of consumer confidence and stock returns during market fluctuations. Using a Markov-switching framework, we first focus on whether the shock to consumer confidence has asymmetric effects on stock returns. We also examine whether the decreased confidence pushes the stock market into bear territory. Empirical evidence using monthly returns on Standard & Poor's S&P 500 price index suggests that market pessimism has larger impacts on stock returns during bear markets. Moreover, the lack of consumer confidence leads to a higher probability of switching to a bear market regime.     

A Measure of Stock Market Integration for Developed and Emerging Markets

A wide array of official capital controls across countries makesit difficult to perform cross-sectional analysis of the effectsof market segmentation. This article constructs a measure ofdeviations from capital market integration that can be consistentlyapplied across countries. It measures the deviations of assetreturns from an equilibrium model of returns constructed assumingmarket integration. Applying the measure to stock returns fromtwenty-four national markets indicates that market segmentationtends to be much larger for emerging markets than for developedmarkets, and that the measure tends to decrease over time. Alongseveral dimensions, the proposed measure yields results thatare consistent with reasonable priors about the relations betweeneffective integration and explicit capital controls, capitalmarket development, and economic growth.