Investor sentiment and its role in asset pricing: An empirical study for India
TL;DR: In this article, the role of the sentiment-based factor in asset pricing to explain prominent equity market anomalies such as size, value, and price momentum for India was evaluated and based on the findings, the composite sentiment index leads other sentiment indices currently in vogue in investment literature.
Abstract: In this paper, we experiment with the construction of alternative investor sentiment indices. Further, we evaluate the role of the sentiment-based factor in asset pricing to explain prominent equity market anomalies such as size, value, and price momentum for India. Based on the findings, we confirm that our Composite Sentiment index leads other sentiment indices currently in vogue in investment literature. The asset pricing models, including the more recent Fama French 5 factor model, are not fully able to explain the small firm effect which is captured by our sentiment-based factor which seems to proxy for the price over-reactions.
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TL;DR: In this article, the authors performed a two-phase analysis to address the research questions of the study, in the first phase, for text analysis NVivo software was used to identify the factors driving herding behavior among Indian stock investors, while in the second phase, the Fuzzy-AHP analysis techniques were employed to examine the relative importance of all the factors determined and assign priorities to the factors extracted.
Abstract: PurposeIn recent years, significant research has focused on the question of whether severe market periods are accompanied by herding behavior. As herding behavior is a considerable cause of the speculative bubble and leads to stock market deviations from their basic values it is necessary to examine the motivators which led to herding behavior among investors. The paper aims to discuss this issue.Design/methodology/approachIn this study, the authors performed a two-phase analysis to address the research questions of the study. In the first phase, for text analysis NVivo software was used to identify the factors driving herding behavior among Indian stock investors. The analysis of a text was performed using word frequency analysis. While in the second phase, the Fuzzy-AHP analysis techniques were employed to examine the relative importance of all the factors determined and assign priorities to the factors extracted.FindingsResults of the study depicted Investor Cognitive Psychology (ICP), Market Information (MI), Stock Characteristics (SC) as the top-ranked factors driving herding behavior, while Socio-Economic Factors (SEF) emerged as the least important factor driving herding behavior.Research limitations/implicationsThe current study was undertaken among stock investors from North India only. Moreover, numerous factors are not part of the study but might significantly influence the investors' herding behaviors.Practical implicationsComprehending the influences of the different factors discussed in the study would enable stock investors to be more aware of their investment choices and not resort to herd behavior. This research enables decision-makers to understand the reasons for herd activity and helps them act accordingly to improve the stock market's performance.Originality/valueThe current study will provide an inclusive overview of herding behavior motivators among Indian stock investors. This study's results can be extremely useful for both academics and policymakers to gain some insight into the functioning of the Indian stock market.
14 citations
TL;DR: In this article, the authors examined the cross-sectional and asymmetric relationship of investor sentiment with the stock returns and volatility in India and found that lower sentiment induces fear-induced selling, thereby lowering the returns and high sentiment is followed by lower future returns as market reverts to fundamentals.
Abstract: The study examines the cross-sectional and asymmetric relationship of investor sentiment with the stock returns and volatility in India.,The investor sentiment is captured using a market-based measure Market Mood Index (MMI) and a survey-based measure Consumer Sentiment Index (CSI). The asymmetric effect of the relationship is examined using quantile causality approach and cross-sectional effect is examined by considering indices such as the BSE Sensex, and the various size indices such as BSE Large cap, BSE Mid cap and BSE Small cap.,The result of the study found that investor sentiment (MMI) cause stock returns at extreme quantiles. Lower sentiment induces fear-induced selling, thereby lowers the returns and high sentiment is followed by lower future returns as market reverts to fundamentals. On the other hand, bullish shifts in sentiment lower the volatility. There exists a positive feedback effect of stock return and volatility in the formation of investor sentiment.,The study captures both asymmetric and cross-sectional relationship of investor sentiment and stock market in an emerging economy, India. The study uses a novel data set (i.e.) MMI which captures the sentiment based on market indicators and are widely disseminated to the public.
13 citations
TL;DR: In this paper , the authors examined the dynamic spillovers between oil price shocks, stock market returns and investor sentiment in the US and Vietnam during the period 2010-2020 and found that oil price and sentiment are net transmitters of shocks in US whereas stock market return is the net recipient.
9 citations
TL;DR: In this paper, the effects of investors' sentiment, return and risk series on one to another of selected exchange rates were analyzed using a time-varying inter-dependence between the observed variables, with the focus on spillovers between the variables.
Abstract: This paper aims to analyze the effects of investors’ sentiment, return and risk series on one to another of selected exchange rates. The empirical analysis consists of a time-varying inter-dependence between the observed variables, with the focus on spillovers between the variables.,Monthly data on the index Sentix, exchange rates EUR–USD, EUR–CHF and EUR–JPY are analyzed from February 2003 to December 2019. The applied methodology consists of vector autoregression models (VAR) with Diebold and Yilmaz (2009, 2011) spillover indices.,The results of the empirical research indicate that using static analysis could result in misleading conclusions, with dynamic analysis indicating that the financial of 2007-2008 and specific negative events increase the spillovers of shock between the observed variables for all three exchange rates. The sources of shocks in the model change over time because of variables changing their positions being net emitters and net receivers of shocks.,The shortfalls of this study include using the monthly data frequency, as this was available for the authors, namely, investors are interested to obtain new information on a weekly and daily basis, not only monthly. However, at the time of writing this research, we could obtain only monthly data.,As the obtained results are in line with previous literature and were found to be robust, there exists the potential to use such analysis in the future when forecasting risk and return series for portfolio management purposes. Thus, a basic comparison was made regarding the investment strategies, which were based on the results from the estimation. It was shown that using information about shock spillovers could result in strategies that can obtain better portfolio value over time compared to basic benchmark strategies.,First, this paper allows for the spillovers of shocks in variables within the VAR models in all directions. Second, a dynamic analysis is included in the study. Third, the mentioned spillover indices are included in the study as well.
7 citations
TL;DR: In this article, the impact of corporate governance, investor sentiment and financial liberalization on downside systematic risk and the interplay of socio-political turbulence on this relationship through static and dynamic panel estimation models was examined.
Abstract: Purpose –We examine the impact of corporate governance, investor sentiment and financial liberalization on downside systematic risk and the interplay of socio-political turbulence on this relationship through static and dynamic panel estimation models.
Design/methodology/approach – Our evidence is based on a sample of 230 publicly listed non-financial firms from Pakistan Stock Exchange (PSX) over the period 2008-2018. Furthermore, we analyze the data through Blundell and Bond (1998) technique in full sample as well sub-samples (Big & Small Firms).
Findings –We document that corporate governance mechanism reduces the downside risk, whereas, investor sentiment and financial liberalization increase the investors’ exposure toward downside risk. Particularly, the results provide some new insights that the socio-political turbulence as a moderator weakens the impact of corporate governance and strengthens the effect of investor sentiment and financial liberalization on downside risk. Consistent with prior studies, the analysis of sub-samples reveal some statistical variations in large and small-size sampled firms. Theoretically, the findings mainly support agency theory, noise trader theory and the Keynesians hypothesis.
Originality/value –Stock market volatility has become a prime area of concern for investors, policy makers and regulators in emerging economies. Primarily, the existence of market volatility is attributed to weak governance, irrational behavior of market participants, liberation of financial policies and sociopolitical turbulence. Therefore, the present study provides simultaneous empirical evidence to determine whether corporate governance, investor sentiment and financial liberalization hinder or spur downside risk in an emerging economy. Furthermore, our work relates to a small number of studies that examine the role of socio-political turbulence as a moderator on the relationship of corporate governance, investor sentiment and financial liberalization with downside systematic risk.
5 citations
Cites background from "Investor sentiment and its role in ..."
...Mispricing of stocks with respect to their fundamental values induces stock return volatility and inefficient allocation of resource in financial markets (Pandey & Sehgal, 2019; Seok et al., 2019; Shahzad et al., 2017)....
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...…there is a plethora of empirical research on the theoretical notion of the role of investor sentiment in shaping capital market volatility (see e.g. Audrino et al., 2020; Hussain & Shah, 2017; Kumari, 2019; Maitra & Dash, 2017; Pandey & Sehgal, 2019; Seok et al., 2019; Shahzad et al., 2017)....
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References
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TL;DR: In this article, the authors identify five common risk factors in the returns on stocks and bonds, including three stock-market factors: an overall market factor and factors related to firm size and book-to-market equity.
24,874 citations
TL;DR: Efficient Capital Markets: A Review of Theory and Empirical Work Author(s): Eugene Fama Source: The Journal of Finance, Vol. 25, No. 2, Papers and Proceedings of the Twenty-Eighth Annual Meeting of the American Finance Association New York, N.Y. December, 28-30, 1969 (May, 1970), pp. 383-417 as mentioned in this paper
Abstract: Efficient Capital Markets: A Review of Theory and Empirical Work Author(s): Eugene F. Fama Source: The Journal of Finance, Vol. 25, No. 2, Papers and Proceedings of the Twenty-Eighth Annual Meeting of the American Finance Association New York, N.Y. December, 28-30, 1969 (May, 1970), pp. 383-417 Published by: Blackwell Publishing for the American Finance Association Stable URL: http://www.jstor.org/stable/2325486 Accessed: 30/03/2010 21:28
18,295 citations
"Investor sentiment and its role in ..." refers background in this paper
...The tenets of traditional classical finance rest on Efficient Market Hypothesis (Fama, 1970) which states that the market price at any time instant reflects all available information in the market....
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...Keywords: investor sentiment, equity pricing anomalies, CAPM, Fama French Model, behavioural finance AC CE PT ED M AN US CR IP T 2 Section 1: Introduction The tenets of traditional classical finance rest on Efficient Market Hypothesis (Fama, 1970) which states that the market price at any time instant reflects all available information in the market....
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...…CAPM, Fama French Model, behavioural finance AC CE PT ED M AN US CR IP T 2 Section 1: Introduction The tenets of traditional classical finance rest on Efficient Market Hypothesis (Fama, 1970) which states that the market price at any time instant reflects all available information in the market....
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TL;DR: In this paper, the authors developed a new approach to the problem of testing the existence of a level relationship between a dependent variable and a set of regressors, when it is not known with certainty whether the underlying regressors are trend- or first-difference stationary.
Abstract: This paper develops a new approach to the problem of testing the existence of a level relationship between a dependent variable and a set of regressors, when it is not known with certainty whether the underlying regressors are trend- or first-difference stationary. The proposed tests are based on standard F- and t-statistics used to test the significance of the lagged levels of the variables in a univariate equilibrium correction mechanism. The asymptotic distributions of these statistics are non-standard under the null hypothesis that there exists no level relationship, irrespective of whether the regressors are I(0) or I(1). Two sets of asymptotic critical values are provided: one when all regressors are purely I(1) and the other if they are all purely I(0). These two sets of critical values provide a band covering all possible classifications of the regressors into purely I(0), purely I(1) or mutually cointegrated. Accordingly, various bounds testing procedures are proposed. It is shown that the proposed tests are consistent, and their asymptotic distribution under the null and suitably defined local alternatives are derived. The empirical relevance of the bounds procedures is demonstrated by a re-examination of the earnings equation included in the UK Treasury macroeconometric model. Copyright © 2001 John Wiley & Sons, Ltd.
13,898 citations
TL;DR: Using a sample free of survivor bias, this paper showed that common factors in stock returns and investment expenses almost completely explain persistence in equity mutual fund's mean and risk-adjusted returns.
Abstract: Using a sample free of survivor bias, I demonstrate that common factors in stock returns and investment expenses almost completely explain persistence in equity mutual funds' mean and risk-adjusted returns Hendricks, Patel and Zeckhauser's (1993) "hot hands" result is mostly driven by the one-year momentum effect of Jegadeesh and Titman (1993), but individual funds do not earn higher returns from following the momentum strategy in stocks The only significant persistence not explained is concentrated in strong underperformance by the worst-return mutual funds The results do not support the existence of skilled or informed mutual fund portfolio managers PERSISTENCE IN MUTUAL FUND performance does not reflect superior stock-picking skill Rather, common factors in stock returns and persistent differences in mutual fund expenses and transaction costs explain almost all of the predictability in mutual fund returns Only the strong, persistent underperformance by the worst-return mutual funds remains anomalous Mutual fund persistence is well documented in the finance literature, but not well explained Hendricks, Patel, and Zeckhauser (1993), Goetzmann and Ibbotson (1994), Brown and Goetzmann (1995), and Wermers (1996) find evidence of persistence in mutual fund performance over short-term horizons of one to three years, and attribute the persistence to "hot hands" or common investment strategies Grinblatt and Titman (1992), Elton, Gruber, Das, and Hlavka (1993), and Elton, Gruber, Das, and Blake (1996) document mutual fund return predictability over longer horizons of five to ten years, and attribute this to manager differential information or stock-picking talent Contrary evidence comes from Jensen (1969), who does not find that good subsequent performance follows good past performance Carhart (1992) shows that persistence in expense ratios drives much of the long-term persistence in mutual fund performance My analysis indicates that Jegadeesh and Titman's (1993) one-year momentum in stock returns accounts for Hendricks, Patel, and Zeckhauser's (1993) hot hands effect in mutual fund performance However, funds that earn higher
13,218 citations
"Investor sentiment and its role in ..." refers methods in this paper
...…returns in the portfolios which were missed by FF3f model, we augment the FF 3 factor model by adding momentum factor (MOM) and thus construct the Carhart (1997) four factor model whose equation is: Rpt – Rft = α + β (Rmt – Rft) + γ SMBt + δ LMHt + λ MOMt + εt (8) AC CE PT ED M AN US CR IP…...
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TL;DR: In this article, the authors show that strategies that buy stocks that have performed well in the past and sell stocks that had performed poorly in past years generate significant positive returns over 3- to 12-month holding periods.
Abstract: This paper documents that strategies which buy stocks that have performed well in the past and sell stocks that have performed poorly in the past generate significant positive returns over 3- to 12-month holding periods. We find that the profitability of these strategies are not due to their systematic risk or to delayed stock price reactions to common factors. However, part of the abnormal returns generated in the first year after portfolio formation dissipates in the following two years. A similar pattern of returns around the earnings announcements of past winners and losers is also documented
10,806 citations
"Investor sentiment and its role in ..." refers background in this paper
...This shows the presence of strong momentum profits as postulated by Jegadeesh and Titman (1993) and confirmed by Chordia and Shivkumar (2002) Panel B and Panel C of table 7 discusses the CAPM results of decile and vigintile portfolios respectively....
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