Investor sentiment, risk factors and stock return: evidence from Indian non‐financial companies

doi:10.1108/17554191211252699

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Investor sentiment, risk factors and stock return: evidence from Indian non‐financial companies

Journal Article•DOI•

Investor sentiment, risk factors and stock return: evidence from Indian non‐financial companies

Saumya Ranjan Dash¹, Jitendra Mahakud•Institutions (1)

Indian Institute of Technology Kharagpur¹

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.

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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 Article•DOI•

Asymmetrical relationship between oil prices, gold prices, exchange rate, and stock prices during global financial crisis 2008: Evidence from Pakistan

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Umaid A. Sheikh, Muzaffar Asad, Zahid Ahmed, Umer Mukhtar

01 Jun 2020-Cogent economics & finance

TL;DR: In this paper, the authors investigated whether the relationship between macroeconomic fluctuations and stock indexes is symmetrical or asymmetrical in nature, and employed nonlinear autoregressive distraction.

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Abstract: The study investigated that whether the relationship between macroeconomic fluctuations and stock indexes is symmetrical or asymmetrical in nature. This study employed nonlinear autoregressive dist...

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48 citations

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

...…are examined only by using linear models (Black et al., 2015; Chen et al., 2012; Gregoriou et al., 2015; Inoguchi, 2014; Khan et al., 2017; Saumya, 2012; Shakil et al., 2018; Tiwari et al., 2015; Zaheer, 2019; Khalil et al., 2018) and no effort was made to find out nonlinear impact of…...
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Journal Article•DOI•

Investor sentiment and its role in asset pricing: An empirical study for India

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Piyush Pandey¹, Sanjay Sehgal²•Institutions (2)

Indian Institute of Technology Bombay¹, University of Delhi²

01 Jun 2019-Iimb Management Review

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.

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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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25 citations

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

...Dash and Mahakud (2012) also developed a sentiment index from the market related proxies and confirmed the unidirectional causal relationship between sentiment index and the two benchmark market indices in India....
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...The expected signs of the sentiment proxy variables (see table 3) used to construct the 3 variants of the sentiment indices are in conformity with the theory and existing empirical literature (refer Baker and Wurgler, 2006) and Dash and Mahakud, 2012)....
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...…with their lag which can be attributed to the fact these two are firm supply response variable to aggregate sentiment in the market which are expected to lag behind proxies that are based directly on investor demand or investor behavior (refer Baker and Wurgler, 2006 and Dash and Mahakud, 2012)....
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...Following Baker and Wurgler (2006) and Dash and Mahakud (2012), we regress these standardized proxies against the market variables as shown below: Senti,t= α+ β1,i IIP+ β2,i FX+ β3,iWPI+ β4,i M3 + β5,i TERM+ β6,i FII+ β7,i D+ εi,t (1) In this regression, Senti,t is one of the many sentiment proxies…...
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...In accordance with existing literature (Baker and Wurgler, 2006 and Dash and Mahakud, 2012), the list of macroeconomic variables used for this purpose alongwith their description and data sources, is given in Exhibit 2....
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Journal Article•DOI•

A review paper on behavioral finance: study of emerging trends

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Aditya Sharma, Arya Kumar

15 May 2019-Qualitative Research in Financial Markets

TL;DR: In this paper, a comprehensive review of literature in favor, as well as against the long held belief of market efficiency is presented, highlighting the gaps in the market efficiency and also suggesting how these gaps can be bridged with a superior approach such as behavioral finance.

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Abstract: This paper participates in the debate on market efficiency and correct approach for asset pricing through a comprehensive review of literature in favor, as well as against the long held belief of market efficiency. The purpose of this paper is to understand emerging trends in behavioral finance and establish its future potential as a mainstream alternative theory of asset pricing.,The review and discussion of literature is mainly divided into three different sections that are –theories supporting efficient market hypothesis (EMH); studies providing evidences from the stock market on the failure of EMH and studies on behavioral finance, discussing separately investors’ behavioral biases keeping in mind their effect on stock prices; and providing empirical evidences on the effect of investor sentiment on stock prices.,The review of literature from both the point of views has helped in understanding the market efficiency issue and changing dynamics of asset pricing approach. This is achieved by highlighting the gaps in the concept of market efficiency and also suggesting how these gaps can be bridged with a superior approach such as behavioral finance. Through further discussion of emerging trends in behavioral finance, the paper also points out gaps and how these can be abridged, for behavioral finance to be accepted as a mainstream alternative approach to EMH.,This is an extensive and one of a kind study that discusses market efficiency through discussion of EMH and behavioral finance side by side. With the help of such a study, researchers can precisely understand the need and can focus on the future course of action to make behavioral finance a mainstream approach to asset pricing.

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21 citations

Journal Article•DOI•

On the relationship between implied volatility index and equity index returns

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Imlak Shaikh¹, Puja Padhi²•Institutions (2)

Birla Institute of Technology and Science¹, Indian Institute of Technology Bombay²

11 Jan 2016-Journal of Economic Studies

TL;DR: In this article, the authors analyzed the asymmetric contemporaneous relationship between implied volatility index (India VIX) and equity index (S & P CNX Nifty Index) in the form of day-of-the-week effects and option expiration cycle and found that the changes in India VIX occur bigger for the negative return shocks than the positive returns shocks.

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Abstract: Purpose – The purpose of this paper is to analyze the asymmetric contemporaneous relationship between implied volatility index (India VIX) and Equity Index (S & P CNX Nifty Index). In addition, the study also analyzes the seasonality of implied volatility index in the form of day-of-the-week effects and option expiration cycle. Design/methodology/approach – This study employs simple OLS estimation to analyze the contemporaneous relationship among the volatility index and stock index. In order to obtain robust results, the analysis has been presented for the calendar years and sub-periods. Moreover, the international evidenced presented for other Asian markets (Japan and China). Findings – The empirical evidences reveal a strong persistence of asymmetry among the India VIX and Nifty stock index, at the same time the magnitude of asymmetry is not identical. The results show that the changes in India VIX occur bigger for the negative return shocks than the positive returns shocks. The similar kinds of result...

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18 citations

Journal Article•DOI•

Conditional multifactor asset pricing model and market anomalies

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Saumya Ranjan Dash¹, Jitendra Mahakud•Institutions (1)

Institute of Management Technology, Ghaziabad¹

04 Nov 2013-Journal of Indian Business Research

TL;DR: In this paper, the authors investigate the firm-specific anomaly effect and identify market anomalies that account for the cross-sectional regularity in the Indian stock market and examine the crosssectional return predictability of market anomalies after making the firm specific raw return risk adjusted with respect to the systematic risk factors in the unconditional and conditional multifactor specifications.

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Abstract: Purpose – The purpose of this paper is to investigate the firm-specific anomaly effect and to identify market anomalies that account for the cross-sectional regularity in the Indian stock market. The paper also examines the cross-sectional return predictability of market anomalies after making the firm-specific raw return risk adjusted with respect to the systematic risk factors in the unconditional and conditional multifactor specifications. Design/methodology/approach – The paper employs first step time series regression approach to drive the risk-adjusted return of individual firms. For examining the predictability of firm characteristics on the risk-adjusted return, the panel data estimation technique has been used. Findings – There is a weak anomaly effect in the Indian stock market. The choice of a five-factor model (FFM) in its unconditional and conditional specifications is able to capture the book-to-market equity, liquidity and medium-term momentum effect. The size, market leverage and short-run...

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13 citations

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

...Evidently, the multifactor specification in terms of the FFM that includes all the relevant systematic risk factors with respect to market, size, book-to-market equity, momentum and liquidity performs much better than the three factor (Fama and French, 1993) or four factor (Carhart, 1997) model specifications (Keene and Peterson, 2007; Lam and Tam, 2011; Dash and Mahakud, 2012)....
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...More specifically, empirical investigations to test such a hypothesis give convincing evidence to believe that the suggested multifactor models incorporating systematic risk factors with respect to market, size, book-to-market equity, momentum and liquidity give better explanations for the cross-section of stock return variation (Fama and French, 1996, 2012; Dash and Mahakud, 2012; Her et al., 2004; Lischewski and Voronkova, 2012)....
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...Following such empirical evidence in the context of emerging stock markets and considering the order driven market structure of the Indian stock market (Dash and Mahakud, 2012), we also expect that the special nature of an order driven market structure may be a the possible reason for the complete explanation of Lq effect among most of the asset pricing models that we consider in our analysis....
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References

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Journal Article•DOI•

The Cross‐Section of Expected Stock Returns

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Eugene F. Fama, Kenneth R. French

01 Jun 1992-Journal of Finance

TL;DR: In this paper, Bhandari et al. found that the relationship between market/3 and average return is flat, even when 3 is the only explanatory variable, and when the tests allow for variation in 3 that is unrelated to size.

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Abstract: Two easily measured variables, size and book-to-market equity, combine to capture the cross-sectional variation in average stock returns associated with market 3, size, leverage, book-to-market equity, and earnings-price ratios. Moreover, when the tests allow for variation in 3 that is unrelated to size, the relation between market /3 and average return is flat, even when 3 is the only explanatory variable. THE ASSET-PRICING MODEL OF Sharpe (1964), Lintner (1965), and Black (1972) has long shaped the way academics and practitioners think about average returns and risk. The central prediction of the model is that the market portfolio of invested wealth is mean-variance efficient in the sense of Markowitz (1959). The efficiency of the market portfolio implies that (a) expected returns on securities are a positive linear function of their market O3s (the slope in the regression of a security's return on the market's return), and (b) market O3s suffice to describe the cross-section of expected returns. There are several empirical contradictions of the Sharpe-Lintner-Black (SLB) model. The most prominent is the size effect of Banz (1981). He finds that market equity, ME (a stock's price times shares outstanding), adds to the explanation of the cross-section of average returns provided by market Os. Average returns on small (low ME) stocks are too high given their f estimates, and average returns on large stocks are too low. Another contradiction of the SLB model is the positive relation between leverage and average return documented by Bhandari (1988). It is plausible that leverage is associated with risk and expected return, but in the SLB model, leverage risk should be captured by market S. Bhandari finds, howev er, that leverage helps explain the cross-section of average stock returns in tests that include size (ME) as well as A. Stattman (1980) and Rosenberg, Reid, and Lanstein (1985) find that average returns on U.S. stocks are positively related to the ratio of a firm's book value of common equity, BE, to its market value, ME. Chan, Hamao, and Lakonishok (1991) find that book-to-market equity, BE/ME, also has a strong role in explaining the cross-section of average returns on Japanese stocks.

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14,517 citations

"Investor sentiment, risk factors an..." refers background or result in this paper

...This is inconsistent with the relative distress effect argument of high BME stocks (Fama and French, 1992)....
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...Since the documentation of size effect by Banz (1981) the asset pricing literature argue towards the presence of a cross sectional structure involving firm characteristics such as book-to-market equity (Fama and French, 1992), short-term momentum (Jegadeesh and Titman, 1993) and liquidity (Amihud, 2002) which cannot be explained by the suggested risk factors of mainstream asset pricing literature....
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...In contrast to Fama and French (1996) we found that Fama and French factors retains their importance while explaining the return on momentum JIBR 4,3 212...
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Journal Article•DOI•

On Persistence in Mutual Fund Performance

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Mark M. Carhart

01 Mar 1997-Journal of Finance

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.

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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

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13,218 citations

"Investor sentiment, risk factors an..." refers background or methods 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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...Model specification and methodology For the present analysis we consider the five factor asset-pricing model (FFM) that augments the Carhart’s (1997) four-factor model with a liquidity factor....
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...Following Fama and French (1993), Carhart (1997), Keene and Peterson (2007) and Lam and Tam (2011), we have constructed five factors designed to mimic risk variables related to MKT (market excess return over the risk-free rate), SMB (i....
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Journal Article•DOI•

Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency

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Narasimhan Jegadeesh, Sheridan Titman

01 Mar 1993-Journal of Finance

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.

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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

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10,806 citations

"Investor sentiment, risk factors an..." refers background in this paper

...Since the documentation of size effect by Banz (1981) the asset pricing literature argue towards the presence of a cross sectional structure involving firm characteristics such as book-to-market equity (Fama and French, 1992), short-term momentum (Jegadeesh and Titman, 1993) and liquidity (Amihud, 2002) which cannot be explained by the suggested risk factors of mainstream asset pricing literature....
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Book Chapter•DOI•

The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets

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John Lintner

01 Feb 1965-The Review of Economics and Statistics

TL;DR: In this article, the problem of selecting optimal security portfolios by risk-averse investors who have the alternative of investing in risk-free securities with a positive return or borrowing at the same rate of interest and who can sell short if they wish is discussed.

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Abstract: Publisher Summary This chapter discusses the problem of selecting optimal security portfolios by risk-averse investors who have the alternative of investing in risk-free securities with a positive return or borrowing at the same rate of interest and who can sell short if they wish. It presents alternative and more transparent proofs under these more general market conditions for Tobin's important separation theorem that “ … the proportionate composition of the non-cash assets is independent of their aggregate share of the investment balance … and for risk avertere in purely competitive markets when utility functions are quadratic or rates of return are multivariate normal. The chapter focuses on the set of risk assets held in risk averters' portfolios. It discusses various significant equilibrium properties within the risk asset portfolio. The chapter considers a few implications of the results for the normative aspects of the capital budgeting decisions of a company whose stock is traded in the market. It explores the complications introduced by institutional limits on amounts that either individuals or corporations may borrow at given rates, by rising costs of borrowed funds, and certain other real world complications.

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9,970 citations

Book•

The econometrics of financial markets

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John Y. Campbell¹, Andrew W. Lo¹, A. Craig MacKinlay¹•Institutions (1)

Princeton University¹

01 Jan 1997

TL;DR: In this paper, Campbell, Lo, and MacKinlay present an attempt by three well-known and well-respected scholars to fill an acknowledged void in the empirical finance literature, a text covering the burgeoning field of empirical finance.

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Abstract: This book is an ambitious effort by three well-known and well-respected scholars to fill an acknowledged void in the literature—a text covering the burgeoning field of empirical finance. As the authors note in the preface, there are several excellent books covering financial theory at a level suitable for a Ph.D. class or as a reference for academics and practitioners, but there is little or nothing similar that covers econometric methods and applications. Perhaps the closest existing text is the recent addition to the Wiley Series in Financial and Quantitative Analysis. written by Cuthbertson (1996). The major difference between the books is that Cuthbertson focuses exclusively on asset pricing in the stock, bond, and foreign exchange markets, whereas Campbell, Lo, and MacKinlay (henceforth CLM) consider empirical applications throughout the field of finance, including corporate finance, derivatives markets, and market microstructure. The level of anticipation preceding publication can be partly measured by the fact that at least three reviews (including this one) have appeared since the book arrived. Moreover, in their reviews, both Harvey (1998) and Tiso (1998) comment on the need for such a text, a sentiment that has been echoed by numerous finance academics.

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7,169 citations