The impact of individual and institutional investor sentiment on the market price of risk

We examine the effect of individual and institutional investor sentiment on the market price of risk derived from DJIA and S&P500 index returns. Consistent with behavioral asset pricing models, we find significant positive response of rational sentiment suggesting greater incentive for rational investors to engage in arbitrage when the compensation for taking risk is greater. Further, an increase in irrational optimism leads to a significant downward movement, but an increase in rational sentiment does not lead to a significant change market price of risk. These results are robust for both market indexes, DJIA and S&P500 and for both individual and institutional investor sentiment.     

Impact of network investor sentiment and news arrival on jumps

This paper studied the influence of news announcements and network investor sentiment on Chinese stock index and index futures market jumps. A machine learning text analysis algorithm was employed to measure investor forum sentiment. It was found that news arrivals were an important reason for jump occurrences, jumps were significantly associated with network investor sentiment, and while occasionally the news and network investor sentiment resulted in simultaneous market jumps, they appeared to be relatively independent. The network investor sentiment time-lag and asymmetric effects were also tested, from which it was found that network investor sentiment had a significant asymmetric effect on the jumps, but time-lag effects had little influence. News announcements and the top 25% of the extreme network sentiments were found to explain more than 50% of the jumps, with extreme sentiments tending to increase the volatility of the news-related jumps and persistently influencing returns after the news-related jumps.     

Spillovers of currency carry trade returns,market risk sentiment,and U.S. market returns

This paper examines the link between spillovers of currency carry trade returns and U.S. market returns. Following Tse and Zhao (2012), this paper hypothesizes that the magnitude of spillovers of currency carry trade returns is positively correlated with market risk sentiment and, therefore, has an impact on market returns. Using the G10 currencies and S&P 500 index futures, the empirical results present a high magnitude of spillover effects of currency carry trade markets. The empirical findings also show a significantly positive relationship between spillovers of currency carry trade returns and subsequent market returns. Furthermore, the results indicate that this relationship is stronger in bear markets than in bull markets. Finally, our findings show that spillovers of currency carry trade returns significantly affect the subsequent transition probabilities of market returns.     

Predicting stock market crises using daily stock market valuation and investor sentiment indicators

The purpose of this paper is to develop a daily early warning system for stock market crises using daily stock market valuation and investor sentiment indicators. To achieve this goal, we use principal components analysis to propose a comprehensive index of daily market indicators that reflects stock market valuation and investor sentiment. Based on the comprehensive index, we employ a logit model with Ensemble Empirical Mode Decomposition to develop a daily early warning system for stock market crises. Finally, we apply the proposed system to the early warning for stock market crises in China. The in-sample forecasting results show that investor sentiment and the forecast horizon by Ensemble Empirical Mode Decomposition improve the forecasting performance of conventional early warning systems. The out-of-sample forecasting results indicate that the proposed warning system still has a good performance.     

The impacts of investor sentiment on returns and conditional volatility of international stock markets

One of the main arguments of behavioral finance is that some properties of asset prices are most probably regarded as deviations from fundamental value and they are generated by the participation of traders who are not fully rational, thus called noise traders. Noise trader theory postulates that sentiment traders have greater impact during high-sentiment periods than during low-sentiment periods, and sentiment traders miscalculate the variance of returns undermining the mean-variance relation. The main objective of this research is to construct a model to evaluate the returns and conditional volatility of various stock market indexes considering the changes in the investor sentiment by measuring the effects of noise trader demand shocks on returns and volatility. EGARCH model is used to determine whether earning shocks have more influence on the conditional volatility in high sentiment periods weakening the mean–variance relation. This paper takes an international approach using weekly market index returns of U.S., Japan, Hong Kong, U.K., France, Germany, and Turkey. Weekly trading volumes of these indexes are regressed against a group of macroeconomic variables and the residuals are used as proxies for investor sentiment and significant evidence is found that there is asymmetric volatility in these market indexes and earning shocks have more influence on conditional volatility when the sentiment is high.     

The momentum and reversal effects of investor sentiment on stock prices

In this paper, we illustrate the real function relationship between the stock returns and change of investor sentiment based on the nonparametric regression model. The empirical results show that when the change of investor sentiment is moderate, the stock return is positively correlated with the change of investor sentiment, presenting an obvious momentum effect. However, the stock return is negatively correlated with the change of investor sentiment if the change of investor sentiment is dramatic, presenting significant reversal effects. Moreover, the degree of reversal effect caused by extremely optimistic sentiment is greater than that driven by extremely pessimistic sentiment, which shows a significant asymmetry. Our findings offer a partial explanation for financial anomalies such as the mean reversion of stock returns, the characteristic of slow rise and steep fall in China's stock market and so on.     

Time-varying lead–lag structure between investor sentiment and stock market

This paper uses the thermal path method to study the lead–lag structure of sentiment and the stock market. First, based on principal component analysis, four indicators are selected to construct the sentiment index. Furthermore, the effectiveness of the thermal path method is verified by numerical simulation. Finally, the lead-lag characteristics of the Shanghai Stock Index and the sentiment index are studied via the symmetric thermal optimal path method. The analysis results show that in the short term, investor sentiment has a leading position in the stock market, which may be related to the herd effect and buying the winners behavior. However, over a longer period of time, investor sentiment is affected mainly by fluctuation in the market, which may be related to the existence of cyclical fluctuations in the market and futures arbitrage. In addition, the stock market's leading effect appears mainly from January 2006 to January 2012, with an average lead time of one month.     

Does investor sentiment impact the returns and volatility of Islamic equities?

In this paper, we estimate generalized autoregressive conditional heteroskedasticity (GARCH) and vector autoregressive (VAR) models to examine whether investor sentiment impacts the returns and volatility of various U.S. Dow Jones Islamic equity indices. The results from GARCH estimations show that changes in investor sentiment are positively correlated with the returns of the Shari’ah-compliant market portfolio. In addition, we find similar results for the three Shari’ah-compliant firm-size portfolios (i.e., large-, medium-, and small-cap). However, this relationship is stronger for harder to arbitrage Shari’ah-compliant stocks; that is, investor sentiment has a greater influence on small-cap equities. Additionally, estimations from the vector autoregressive model confirm the aforementioned results. In terms of volatility, GARCH estimations suggest that bullish shifts in investor sentiment in the current period are accompanied by lower conditional volatility in the ensuing period. In general, our findings suggest that as noise traders create more risk the market seems to reward them with higher expected returns.     

The fluctuation correlation between investor sentiment and stock index using VMD-LSTM: Evidence from China stock market

The impact of the investor sentiment on China’s capital market price volatility is concerned under the perspective of the behavioral finance. Firstly, in terms of the existing methods of establishing the investor sentiment index, the composite investor sentiment index which include six indicators (five objective indicators and a subjective indicator) are obtained. Secondly, VMD-LSTM (Variational Mode Decomposition and Long Short Term Memory) hybrid neural network model is used to decompose and restructure the investor sentiment index and the Shanghai Security Exchange Composite Index (SSEC) into the short-term, medium-term and long-term trend. Each trend is trained to obtain the forecasting results in three different time scales, and then to achieve the final predicting results by superimposing the output of each trend. Furthermore, compare with other prediction methods, the model can indeed improve the overall predicting accuracy. Finally, GARCH model and the co-integration error regression model are used to discuss the fluctuation correlation and VAR (Vector Auto-regression) models are established to analyze the causality between the stock market indices and the investor sentiment index.     

Information asymmetry,sentiment interactions,and asset price

We develop an asset pricing model with sentiment interactions between institutional and individual investors under the condition of information asymmetry. Our model considers private information and investor sentiment, two imperfections in securities markets, and integrates them into a theoretical model to investigate the role of the interaction between information asymmetry and investor sentiment in asset pricing. We show that the joint effect of private information and investor sentiment deviate the price of risky assets and efficiently explains anomalies in the stock market. Investor sentiment changes the effect of information on the equilibrium price relative to a world where all investors are completely rational. Private information changes the effect of investor sentiment on the equilibrium price in comparison with a scenario with symmetric market information. In addition, the individual investors’ learning and the disclosure of information both allow private information to be better integrated into the price and simultaneously changes the effect of investor sentiment on the equilibrium price.     

基于投资者情绪的IPO首日收益研究

本文借鉴国内外学者关于投资者情绪度量指标选取的方法,遴选出适合中国证券市场特征的四类投资者情绪指标,通过主成分分析方法提取反映投资者情绪的主要因素,并在此基础上,利用VAR模型对投资者情绪与IPO首日收益之间的领先滞后关系进行刻画,主要考察投资者情绪的新息冲击对IPO首日收益动态脉冲影响.结果表明,投资者情绪显著影响IPO首日收益,投资者对未来的预期同样受到IPO首日表现的影响,投资者情绪指标之间存在显著的扩散和弥漫效应.     

Overnight stock returns,intraday returns,and firm-specific investor sentiment

In this study, we propose a new index for measuring firm-specific investor sentiment using overnight and intraday stock returns. We use actual equity data to construct the firm-level investor sentiment index and find that the new index has characteristics expected of a sentiment measure. In addition, we propose a novel sentiment-weighted trading strategy and apply it to momentum and short-term reversal strategies. We find that the sentiment-weighted trading strategy generates better performance in momentum and short-term reversal strategies. The sentiment-weighted trading strategy’s superior performance is evidence that our firm-level investor sentiment index possesses predictive powers with regard to future returns.     

Excess co-movement of agricultural futures prices: Perspective from contagious investor sentiment

This study investigates the excess co-movement of agricultural futures prices from a new perspective of contagious investor sentiment. This study shows that contagious investor sentiment is a key determinant of excess co-movement of agricultural futures prices, by using contagious investor sentiment among different agricultural futures. Further, this study decomposes contagious investor sentiment into expected and unexpected contagious investor sentiment. Results show that both of them can positively affect excess co-movement of agricultural futures prices. More interestingly, expected contagious investor sentiment outperforms unexpected contagious investor sentiment in soybean 1 future, soymeal future, and strong wheat future. In general, the results of this study can provide strong support for the significant roles of contagious investor sentiment in asset pricing applications.     

Extreme risk transmission channels between the stock index futures and spot markets: Evidence from China

We develop a skewness-dependent multivariate conditional autoregressive value at risk model (SDMV-CAViaR) to detect the extreme risk transmission channels between the Chinese stock index futures and spot markets. The proposed SDMV-CAViaR model improves the forecast performance of extreme risk by introducing the high-frequency realized skewness. Specifically, the realized skewness has a significant impact on the spillovers, but the realized volatility and realized kurtosis do not, which implies that the jump component plays an important role in extreme risk spillovers. The empirical results indicate there are bidirectional extreme risk spillovers between the stock index futures and spot markets, the decline of one market has direct and indirect channels to exacerbate the extreme risk of the other market. Firstly, the market decline will directly increase the extreme risk of related markets by decreasing market returns. Besides, the decline will indirectly increase the extreme risk by increasing the negative realized skewness and extreme risk spillovers.     

Horse race of weekly idiosyncratic momentum strategies with respect to various risk metrics: Evidence from the Chinese stock market

This paper focuses on the horse race of weekly idiosyncratic momentum (IMOM) with respect to various idiosyncratic risk metrics. Using the A-share individual stocks in the Chinese market from January 1997 to December 2017, we first evaluate the performance of the weekly momentum based on raw returns and idiosyncratic returns, respectively. After that the univariate portfolio analysis is conducted to investigate the return predictability with respect to various idiosyncratic risk metrics. Further, we perform a comparative study on the performance of the IMOM portfolios with respect to various risk metrics. At last, we explore the possible explanations to IMOM as well as risk-based IMOM portfolios. We find that 1) there are prevailing contrarian effect and IMOM effect for the whole sample; 2) the negative relations exist between most of the idiosyncratic risk metrics and the cross-sectional stock returns, and better performance is linked to idiosyncratic volatility (IVol) and maximum drawdowns (IMDs); 3) additionally, the IVol-based and IMD-based IMOM portfolios exhibit better explanatory power to the IMOM portfolios with respect to other risk metrics; 4) finally, higher profitability of IMOM as well as IVol-based and IMD-based IMOM portfolios is found to be related to upside market states, high levels of liquidity and high levels of investor sentiment.     

Stock Market’s responses to intraday investor sentiment

We investigate the effect of intraday sentiment on subsequent stock returns. Mispricing caused by intraday sentiment is not corrected immediately; rather, it lasts for about 30 min. After 30 min, however, investor sentiment negatively affects stock returns, suggesting that mispriced stocks are at least partially but not entirely adjusted back to their fundamental values. We also show that the effect of intraday sentiment depends on the degree of arbitrage. Intraday sentiment has little effect on firms that are easy to arbitrage. For these firms, the difference in the one-minute returns of firms with high and low sentiment is nearly zero, implying that any mispricing caused by intraday sentiment is immediately corrected for this group of firms. In contrast, among firms that are hard to arbitrage, the difference in the returns of firms with high and low sentiment lasts for about half an hour. This difference in the effect of intraday sentiment is not caused by the firms’ liquidities.     

Scheduled macroeconomic news announcements and intraday market sentiment

We analyze the effects of scheduled macroeconomic news on intraday and daily market sentiment by comparing sentiment on news announcement dates with that on non-announcement dates. Announcements of macroeconomic indicators change neither intraday nor daily market sentiment. However, the directions of the announced values have asymmetric effects on intraday market sentiment, although they do not affect daily market sentiment. For example, an announcement of an increase in the gross domestic product (GDP) reduces short-term intraday market sentiment, whereas an announcement of a decrease in GDP does not significantly affect intraday market sentiment. We also find that the effect of intraday market sentiment on short-term market returns is greater following announcements of macroeconomic indicators that significantly affect intraday market sentiment.     

Stock prices and the location of trade: Evidence from China-backed ADRs

This study examines whether the trading location affects equity returns of China-backed American Depository Receipts (ADRs) traded in the US. If International Financial Markets are integrated, stock prices should be affected only by their fundamentals; otherwise, stock prices may also be affected by their trading locations/investor sentiment. We find that China ADRs’ returns are affected more by the US market fluctuations than by Chinese market returns. We interpret the results as suggesting that International Financial Markets are at least partially segmented and country-specific investor sentiment affects stock prices.     

The 1986–88 stock market: Investor sentiment or fundamentals?

This paper tests the widely held proposition that investor sentiment contributed to the stock market crash of 1987. Using weekly data during the 1986–8 period and conventional measures of stock fundamentals, changes in fundamentals are found to have a statistically significant influence on the movement of stock prices. In addition, a much-discussed measure of investor sentiment is used to test the proposition that investor sentiment contributed to the stock market crash of 1987. However, insignificant results regarding the investor sentiment index suggest that either the recently proposed sentiment index is faulty or investor sentiment did not significantly influence stock prices in the period surrounding the 1987 crash.     

Investor sentiment and country exchange traded funds: Does economic freedom matter?

Using unbalanced panel data of 27 iShares MSCI country-specific exchange traded funds (ETFs) over the period 1996–2014, this paper applies quantile regression to examine the impacts of global, foreign, and U.S. investor sentiments on the returns of the ETFs traded in the U.S. markets. We further investigate whether a country’s economic freedom affects the relationship between investor sentiments and ETF returns. We find that ETF returns are strongly determined by investor sentiments and the ETF expense ratio. The quantile regression approach reveals that high-return ETFs are positively sensitive to changes in global sentiment (measured by market turnover, VIX, U.S. federal funds rate), foreign sentiment (measured by current account balance, inflation, market turnover, public debt), U.S. sentiment, currency exchange ratio, and expense ratio, while negatively influenced by economic freedom and Asian proxy. The effects of VIX and foreign inflation are a reversal; that is, returns from lower (higher) quantiles have a negative (positive) relation with VIX and foreign inflation. Not all components of economic freedom affect returns equally.