Investor sentiment, risk factors and stock return: evidence from Indian non‐financial companies
17 Aug 2012-Journal of Indian Business Research (Emerald Group Publishing Limited)-Vol. 4, Iss: 3, pp 194-218
TL;DR: This article employed the Fama and French time series regression approach to examine the impact of market risk premium, size, book-to-market equity, momentum and liquidity as risk factors on stock return.
Abstract: Purpose – The purpose of this paper is to evaluate the pricing implication of aggregate market wide investor sentiment risk for cross sectional return variation in the presence of other market wide risk factors.Design/methodology/approach – The paper employs the Fama and French time series regression approach to examine the impact of market risk premium, size, book‐to‐market equity, momentum and liquidity as risk factors on stock return. Given the importance of inherent imperfect rationality or sentiment risk, the paper further investigates the impact of investor sentiment on the cross section of stock return.Findings – The choice of a five factor model is apparently persuasive for consideration in investment decisions. Stocks are hard to value and difficult to arbitrage with characteristics which are significantly influenced with the sentiment risk. It is naive to argue for the universal pricing implication of sentiment risk in a multifactor model framework.Research limitations/implications – The test as...
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TL;DR: In this article, the causal relationship between investor sentiment index constructed from various market related implicit proxies, and aggregate stock market indices such as BSE sensex and NSE Nifty indices was examined.
Abstract: The impact of investor sentiment on stock market price has been a subject of long standing interest to both economists and practitioners. Following the theoretical argument of behavioral asset pricing, recent literature confirms the possible linkage between the aggregate investor sentiment and stock returns. In this paper we examine the causal relationship between investor sentiment index constructed from various market related implicit proxies, and aggregate stock market indices such as BSE sensex and NSE Nifty indices. The Johansen co-integration test is applied to measure the long-term relationship between the sentiment index and market indices and Error Correction Method has been used to check the short-term relationship between the two variables. Granger causality test is used to check the causal relationship between them. Our results suggest that, given the evidence of comovements of sentiment and market index there is significant long-run and short-run relationship between the two indices. Consistent with the existing literature which suggest that the sentiment effect is a short-run phenomena, our findings gives an indication that long term investment strategy can effectively mitigate the sentiment risk. The results for causality test suggest that there exist a unidirectional causal relationship between the sentiment index and market indices.
10 citations
Cites background from "Investor sentiment, risk factors an..."
...…the existing literature support a positive (negative) relationship between investors sentiment and contemporaneous (expected) stock returns because of the overvaluation (undervaluation) in the stock prices (Baker et al., 2011; Dash and Mahakud, 2012; Finter et al., 2011; Stambaugh et al., 2011)....
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...In the equation (9) the positive or negative impact of MRISP on the AISI is consistent with the theoretical arguments given in the related literature (Baker and Wurgler, 2006, 2007; Brown and Cliff, 2004, 2005; Kumar and Lee, 2006Baker et al., 2011; Dash and Mahakud, 2012)....
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...As an indicator of the breadth and depth of a market, high STV indicates better liquidity or bullish sentiment in the market (Dash and Mahakud, 2012)....
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TL;DR: In this article, the authors investigated the symmetrical relationship between macroeconomic variability and KSE-100 indexes by employing the ARDL model with bound testing procedure and error correction, and found that the relationship was symmetric.
Abstract: The study is intended to investigate the symmetrical relationship between macroeconomic variability and KSE-100 indexes by employing the ARDL model with bound testing procedure and error correction...
7 citations
Cites methods from "Investor sentiment, risk factors an..."
...Building upon arbitrage pricing theory, Saumya (2012) recommended investing in those shares that are affected by sentiment risks of investors especially when the market is following depreciating trends because such stocks are hard to value and difficult to arbitrage....
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TL;DR: In this article, the asymmetrical linkages between gold-oil exchange rates and Bombay stock indexes were investigated by utilizing a nonlinear ARDL approach covering torsion coefficients of stock indexes.
Abstract: The primary objective of this research article is to investigate the asymmetrical linkages between gold-oil-exchange rates and Bombay stock indexes by utilizing a nonlinear ARDL approach covering t...
7 citations
TL;DR: In this article, the authors analyze the returns of various asset classes and correlate these with their risk characteristics in order to verify whether there is always a positive relation between risk and return across all asset classes.
Abstract: Every investor’s dream is to maximize return with minimum risk. Since this is practically impossible, the target is to optimize the risk and return. Different asset classes perform differently at different points of time. The performance is affected by the business as well as other local and global macroeconomic parameters. Crude oil, real estate, gold etc. have given very high returns previously but have turned unattractive in recent times. Equity market has over a long term returned handsome benefits but is highly volatile and hence fraught with risks. The risk free investments like fixed, on the other hand, fall in the low-risk low-return category. The purpose of this study is to analyze the returns of various asset classes and correlate these with their risk characteristics in order to verify whether there is always a positive relation between risk and return across all asset classes and to find out the portfolio mix of the various asset classes corresponding to the desired return and risk.
5 citations
18 Dec 2014
TL;DR: In this article, the authors examined the equity investment decision process of retail investors in Sri Lanka and found out that the firm's perceived value is the most influencing factor in equity selection.
Abstract: The study examines the equity investment decision process of retail investors in Sri Lanka. Opinions are solicited using a five-point Likert scale survey questionnaire. The analysis of 168 responses indicates that the firm’s perceived value is the most influencing factor in equity selection. The study identifies Accounting Information, Advocates’ Recommendations and Self-Image/Firm-Image to be significant homogeneous groups of the factors influencing stock selection. The risk and historical prices are the second order factors in the process. Decision is also influenced by investors’ expectations on political stability, economic condition and good governance. Goodwill of the firm, stock’s liquidity, dividend payout and publicly available news are marginal factors. The religious beliefs, the family background and advocates’ opinion do not influence while the content of the annual financial statements is less confident. Investors do not aim abnormal returns. The main influencing factors do not show gender, age and education differences. The paper provides insights in to behavioral explanations to many market anomalies; that the investor sentiment is of immense importance. Keywords: Investor, Behavior, Stock, Selection, Sri Lanka For full paper: fmscresearch@sjp.ac.lk
5 citations
References
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TL;DR: In this paper, the authors present a critique of expected utility theory as a descriptive model of decision making under risk, and develop an alternative model, called prospect theory, in which value is assigned to gains and losses rather than to final assets and in which probabilities are replaced by decision weights.
Abstract: This paper presents a critique of expected utility theory as a descriptive model of decision making under risk, and develops an alternative model, called prospect theory. Choices among risky prospects exhibit several pervasive effects that are inconsistent with the basic tenets of utility theory. In particular, people underweight outcomes that are merely probable in comparison with outcomes that are obtained with certainty. This tendency, called the certainty effect, contributes to risk aversion in choices involving sure gains and to risk seeking in choices involving sure losses. In addition, people generally discard components that are shared by all prospects under consideration. This tendency, called the isolation effect, leads to inconsistent preferences when the same choice is presented in different forms. An alternative theory of choice is developed, in which value is assigned to gains and losses rather than to final assets and in which probabilities are replaced by decision weights. The value function is normally concave for gains, commonly convex for losses, and is generally steeper for losses than for gains. Decision weights are generally lower than the corresponding probabilities, except in the range of low prob- abilities. Overweighting of low probabilities may contribute to the attractiveness of both insurance and gambling. EXPECTED UTILITY THEORY has dominated the analysis of decision making under risk. It has been generally accepted as a normative model of rational choice (24), and widely applied as a descriptive model of economic behavior, e.g. (15, 4). Thus, it is assumed that all reasonable people would wish to obey the axioms of the theory (47, 36), and that most people actually do, most of the time. The present paper describes several classes of choice problems in which preferences systematically violate the axioms of expected utility theory. In the light of these observations we argue that utility theory, as it is commonly interpreted and applied, is not an adequate descriptive model and we propose an alternative account of choice under risk. 2. CRITIQUE
35,067 citations
"Investor sentiment, risk factors an..." refers background in this paper
...(Kahneman and Tversky, 1979), and limited arbitrage in determining stock prices (Brown and Cliff, 2005; Shleifer and Vishny, 1997)....
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27,773 citations
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
"Investor sentiment, risk factors an..." refers background in this paper
...In recent years, following the theoretical argument of multifactor model specification (Merton, 1973; Ross, 1976) and motivated with the characteristic based risk pricing, the three factor (Fama and French, 1993), and four factor model (Carhart, 1997) have been widely debated and acclaimed in asset pricing literature to explain the cross section of average stock returns....
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TL;DR: In this article, a simple method of calculating a heteroskedasticity and autocorrelation consistent covariance matrix that is positive semi-definite by construction is described.
Abstract: This paper describes a simple method of calculating a heteroskedasticity and autocorrelation consistent covariance matrix that is positive semi-definite by construction. It also establishes consistency of the estimated covariance matrix under fairly general conditions.
18,117 citations
TL;DR: In this paper, the authors present a body of positive microeconomic theory dealing with conditions of risk, which can be used to predict the behavior of capital marcets under certain conditions.
Abstract: One of the problems which has plagued thouse attempting to predict the behavior of capital marcets is the absence of a body of positive of microeconomic theory dealing with conditions of risk/ Althuogh many usefull insights can be obtaine from the traditional model of investment under conditions of certainty, the pervasive influense of risk in finansial transactions has forced those working in this area to adobt models of price behavior which are little more than assertions. A typical classroom explanation of the determinationof capital asset prices, for example, usually begins with a carefull and relatively rigorous description of the process through which individuals preferences and phisical relationship to determine an equilibrium pure interest rate. This is generally followed by the assertion that somehow a market risk-premium is also determined, with the prices of asset adjusting accordingly to account for differences of their risk.
17,922 citations