Impact of investor sentiment on mutual fund risk taking and performance: evidence from China

ABSTRACT

This study provides empirical rationale and guidance for incorporating investor sentiment into mutual fund enterprise information systems. It investigates the effect of fund-specific investor sentiment on fund risk taking and performance. Working on a sample of equity funds in China, our panel regressions reveal that fund risk-taking is negatively related to lagged fund-specific investor sentiment. Investor sentiment is negatively linked to subsequent fund performance, which conforms with the dumb money effect. Encouragingly, there is evidence that mutual fund managers in China possess investing expertise. Fund-specific investor sentiment shows asymmetric impacts. The dumb money effect is primarily driven by positive sentiment.     

有效市场假设和行为金融学--关于资本市场效率的理论

本文是对资本市场效率问题研究的一个简要回顾和介绍。资本市场效率决定了资本配置、使用的效率,因此是金融经济学的一个主要组成部分。芝加哥商学院教授法玛1970年正式提出有效市场假说(EMH),认为股票价格包含了所有相关信息因而是有效的。在此后很长一段时间内,EMH成为现代金融学的基石。但是近年来,越来越多的理论和实证的发现表明,市场是非有效的。这些理论和实证发现形成了对资本市场效率的新认识—行为金融学。     

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.     

Forecasting abnormal stock returns and trading volume using investor sentiment: Evidence from online search

We examine the ability of online ticker searches (e.g. XOM for Exxon Mobil) to forecast abnormal stock returns and trading volumes. Specifically, we argue that online ticker searches serve as a valid proxy for investor sentiment — a set of beliefs about cash flows and investment risks that are not necessarily justified by the facts at hand — which is generally associated with less sophisticated, retail investors. Based on prior research on investor sentiment, we expect online search intensity to forecast stock returns and trading volume, and also expect that highly volatile stocks, which are more difficult to arbitrage, will be more sensitive to search intensity than less volatile stocks. In a sample of S&P 500 firms over the period 2005-2008, we find that, over a weekly horizon, online search intensity reliably predicts abnormal stock returns and trading volumes, and that the sensitivity of returns to search intensity is positively related to the difficulty of a stock being arbitraged. More broadly, our study highlights the potential of employing online search data for other forecasting applications.     

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.     

Do the carry trades respond to geopolitical risks? Evidence from BRICS countries

This paper aims to analyze the implications of geopolitical risks on the return and volatility of carry trade transactions in the context of BRICS countries for the period 2006–2020. Fixed effects regressions considering the sample countries as a single portfolio document that geopolitical risks are correlated with volatility, while the results are inconclusive for returns. The non-parametric time-varying coefficients panel data estimations further indicate that the effect of geopolitical risks on carry trade volatility is amplified during the Global Financial Crisis and the post-2016 episode. Moving to the disaggregated data, the time-varying robust Granger causality test of Rossi and Wang (2019) show that geopolitical risks have a significant in-sample predictive power for both carry trade return and volatility during a myriad of sub-periods, which can not be captured by standard constant parameter techniques in the presence of instabilities. Overall, our empirical results suggest that the exposure to geopolitical risks should be taken into account by global investors for risk diversification purposes when entering carry trade positions in BRICS countries.     

Geopolitical risk and stock market volatility in emerging markets: A GARCH – MIDAS approach

In this study, we examine the connection between geopolitical risk (GPR) and stock market volatility in emerging economies. Our motivation for this study is premised on the need to assess both the predictability and the associated economic gains in relation to the subject in order to offer more useful insights to investors and practitioners. To the best of our knowledge, this is the first study that jointly considers these objectives. Consequently, we employ the GARCH-MIDAS framework which accommodates mixed data frequencies thereby circumventing information loss or any associated bias. We find that emerging stock market volatility responds more positively to geopolitical risks although the act-related GPR index offers better out-of-sample forecasts than the threat-related GPR. We also find that accounting for global economic factors in the predictability analysis is crucial for robust outcomes. Finally, we provide some utility gains of including GPR in the predictive model of stock market volatility while also highlighting some useful implications of our findings for investment and policy decisions.     

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.     

Does investor sentiment affect fund crashes? Evidence from Chinese open-end funds

This paper aims to detect the impact of investor sentiment on the open-end fund crashes, drawing on the open-end stock funds and partial stock funds of China for the 2009–2019 period. The results show that the rise of investor sentiment will significantly increase the risk of the open-end fund crashes, which remains valid after robustness tests. Further researches indicate that the market timing and stock selection abilities of fund managers weaken the positive impact of investor sentiment on the open-end fund crashes, and the market illiquidity promotes the positive impact of investor sentiment on the open-end fund crashes.