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Journal ArticleDOI

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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Journal ArticleDOI
TL;DR: In this paper, the authors examined the relation of stock return, foreign equity inflow, and investor sentiment in Indonesian Islamic stocks using monthly data from 2012 to 2018 and 109 firms with 9,156 total observations.
Abstract: Our study aims to examine the relation of stock return, foreign equity inflow, and investor sentiment in Indonesian Islamic stocks. We use monthly data from 2012 to 2018 and 109 firms with 9,156 total observations. Considering heterogeneity and endogeneity assumption, our models are estimated by the system generalized method of moment. Our research found a positive bi-directional effect between stock return and investor sentiment on the contemporaneous period and the uni-directional effect in which investor sentiment negatively impacts stock return. Our research also found a between stock return and foreign investor inflow. Last but not least, those imply to asset pricing, trading strategy, and portfolio management in Islamic shares.

3 citations

Journal Article
TL;DR: In this article, the impact of investor sentiment, human capital, and Fama-French risk factors in multiple factor asset pricing models was explored using monthly data from January 2000, through January 2014.
Abstract: This paper examines pricing implications of investors’ behavioral biasness in the Malaysian equity market. By using monthly data from January 2000, through January 2014, we explore the impact of investor sentiment, human capital, and Fama -French risk factors in multiple factor asset pricing models. A unique seven-variable composite index is used for the measurement of investor sentiment. Results indicate that sentiment is a priced risk, and display the ability to capture returns unexplained by SMB (Small minus Big) and HML (High minus Low) factors. Evidence suggests that sentiment is a source of systemic risk, and effectively explains returns of stocks with opaque characteristics. Modeling aggregate labor income produces insignificant results, suggesting that there are no returns for human capital in the Malaysian equity market. The Fama and French three factor model together with investor sentiment risk achieves a substantial pricing efficiency. Keywords: Investor sentiment; human capital; returns; Malaysia. ABSTRAK Kajian ini menyelidik tentang implikasi gelagat pelabur yang bias di pasaran Malaysia. Dengan menggunakan data bulanan dari bulan Januari 2000 hingga bulan Januari 2014, kami mengkaji kesan sentimen pelabur, modal insan dan faktor risiko Fama-French dalam model perletakan harga aset pelbagai faktor. Tujuh pembolehubah yang unik digunakan untuk mengukur sentimen pelabur. Hasil kajian menunjukkan bahawa sentimen adalah risiko harga, dan memaparkan keupayaan untuk mengambil kira pulangan yang tidak dapat dijelaskan oleh factor SMB (Kecil tolak Besar) dan faktor HML (Tinggi tolak Rendah). Bukti kajian menunjukkan bahawa sentimen adalah sumber risiko yang sistematik, dan dengan jelas menerangkan pulangan saham yang mempunyai ciri-ciri legap. Hasil kajian juga menunjukkan model pendapatan tenaga kerja adalah tidak signifikan dan keputusan ini menggambarkan bahawa tidak ada pulangan untuk modal insan di pasaran Malaysia. Model tiga faktor Fama-French bersama dengan risiko sentimen pelabur mencapai kecekapan harga yang besar. Kata kunci: Sentimen pelabur; modal insan; pulangan; Malaysia.

3 citations

Journal ArticleDOI
30 Jun 2017
TL;DR: In this paper, a review of the literature on asset pricing and investor sentiment is presented, with an objective of showing how productive has been the effort of modelling market sentiment in pricing assets.
Abstract: This paper reviews literature on asset pricing and investor sentiment. It provides a fair accumulation of evidence with an objective of showing how productive has been the effort of modelling market sentiment in pricing assets. Research efforts in modelling non-standard investor behaviour have been successful in explaining aggregate predictability. However, despite the financial innovations and discussions on investor sentiment that happened in US markets, empirical work in emerging markets is still preliminary. The paper inquires the extent that the existing asset pricing models price the assets in the economy. Keywords Investor, Pricing, Returns, Sentiment

2 citations

Journal ArticleDOI
01 May 2021
TL;DR: The advancements in technology, increased accessibility to various modes and platforms of communication, and increased willingness on the part of participants to share their ideas/opinions has resu... as discussed by the authors.
Abstract: The advancements in technology, increased accessibility to various modes and platforms of communication, and increased willingness on the part of participants to share their ideas/opinions has resu...

2 citations

Journal Article
TL;DR: In this paper, the authors test pricing implications using Size, Liquidity and BM ranked portfolios and find that small and illiquid stocks are exposed more to sentiment risk. And quantile regressions reveal an asymmetric influence of investor sentiment, a large (small) effect is observed on stocks with high (low) returns.
Abstract: Market illiquidity and investor sentiment show a significant role in Malaysian capital market, the variation of average stock returns left unexplained by capital asset pricing model is covered effectively by illiquidity and sentiment risks. Our investor sentiment measure consists of six market proxies. This study tests pricing implications using Size, Liquidity and BM ranked portfolios. It finds that small and illiquid stocks are exposed more to sentiment risk. Illiquidity and sentiment factors jointly explain the variations explained by size and value effects. Furthermore, quantile regressions reveal an asymmetric influence of investor sentiment, a large (small) effect is observed on stocks with high (low) returns. A three factor model directed at capturing illiquidity and investor sentiment risks is apparently persuasive in this market.

1 citations


Cites background from "Investor sentiment, risk factors an..."

  • ...…and Cliff, 2004), advance-decline ratio (ADR) (Finter et al., 2011), buy and sell imbalance ratio (Kumar and Lee, 2006), share turnover velocity (Mahakud and Dash, 2012), net cash flows to equity funds (Randall et al., 2003), institutional churn (Chae et al., 2008) and number of new stock…...

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  • ...DivP is the log difference of the average market-to-book ratios of dividend payer and nonpayer stocks, CMF is the monthly percent change in margin finance position, and COI is the monthly percent COI from equity derivatives market....

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  • ...ISA=0.459ADR+0.531TR−0.321DivP+0.459RIPO+0.215CMF+ 0.382COI (3) In this index, ISA is the macro adjusted IS....

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  • ...ISt=ADRt+TRt−DivPt+RIPOt+CMFt+COIt (1) Literature argues that market sentiment partially shows a rationally developed economic reflection, the general economic indicators should rationally drive the sentiment up or down....

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  • ...…2004; Finter et al., 2011), TR (June et al., 2003), dividend premium (DivP) (Baker and Wurgler, 2007), first day return on initial public offers (Baker and Wurgler, 2007), change in margin finance position (CMF) (Brown and Cliff, 2004; Mahakud and Dash, 2012) and the change in open interest (COI)....

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References
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Book ChapterDOI
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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Journal ArticleDOI
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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ReportDOI
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

Journal ArticleDOI
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