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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Posted Content•

Investor Sentiment and the Cross-Section of Stock Returns

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Malcolm Baker¹, Jeffrey Wurgler²•Institutions (2)

Harvard University¹, New York University²

01 Apr 2004-Research Papers in Economics

TL;DR: This article examined how investor sentiment affects the cross-section of stock returns and found that when sentiment is low, subsequent returns are relatively high on smaller stocks, high volatility stocks, unprofitable stocks, non-dividend-paying stocks, extreme-growth stocks, and distressed stocks, consistent with an initial underpricing of these stocks.

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Abstract: We examine how investor sentiment affects the cross-section of stock returns. Theory predicts that a broad wave of sentiment will disproportionately affect stocks whose valuations are highly subjective and are difficult to arbitrage. We test this prediction by studying how the cross-section of subsequent stock returns varies with proxies for beginning-of-period investor sentiment. When sentiment is low, subsequent returns are relatively high on smaller stocks, high volatility stocks, unprofitable stocks, non-dividend-paying stocks, extreme-growth stocks, and distressed stocks, consistent with an initial underpricing of these stocks. When sentiment is high, on the other hand, these patterns attenuate or fully reverse. The results are consistent with predictions and appear unlikely to reflect an alternative explanation based on compensation for systematic risk.

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2,898 citations

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

...However, there is ample possibility that some of the MRSP may exhibit lead-lag relationships with the aggregate market wide sentiment and some variables may reflect a shift in sentiment earlier than others (Baker and Wurgler, 2006)....
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...As there are no perfect or uncontroversial proxies for measuring sentiment (Baker and Wurgler, 2006; Brown and Cliff, 2004), our approach is necessarily concentrate on 11 such MRSP suggested by prior literature to form a composite sentiment index encompassing the common variation in such underlying proxies....
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...Baker and Wurgler (2007) suggest that the existing literature can be categories in terms of top-down or bottom-up approach....
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...In this regard we follow the bottom-up approach of Baker and Wurgler (2006) to construct investor sentiment Index from selected MRSP....
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...Second, implicit sentiment proxy derived from indirect measures of sentiment from selected market statistics and market parameters with theoretical argument towards market movement (Baker and Wurgler, 2006)....
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Journal Article•DOI•

An intertemporal asset pricing model with stochastic consumption and investment opportunities

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Douglas T. Breeden¹•Institutions (1)

Stanford University¹

01 Sep 1979-Journal of Financial Economics

TL;DR: In this paper, the authors derived a single-beta asset pricing model in a multi-good, continuous-time model with uncertain consumption-goods prices and uncertain investment opportunities.

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2,667 citations

Journal Article•DOI•

Investor Sentiment in the Stock Market

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Malcolm Baker¹, Jeffrey Wurgler²•Institutions (2)

Harvard University¹, New York University²

29 Jun 2007-Journal of Economic Perspectives

TL;DR: In this article, the authors develop a top-down approach to measure investor sentiment and quantify its effects, and show that it is quite possible to measure sentiment and that waves of sentiment have clearly discernible, important, and regular effects on individual firms and on the stock market as a whole.

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Abstract: Investor sentiment, defined broadly, is a belief about future cash flows and investment risks that is not justified by the facts at hand. The question is no longer whether investor sentiment affects stock prices, but how to measure investor sentiment and quantify its effects. One approach is "bottom up," using biases in individual investor psychology, such as overconfidence, representativeness, and conservatism, to explain how individual investors underreact or overreact to past returns or fundamentals. The investor sentiment approach that we develop in this paper is, by contrast, distinctly "top down" and macroeconomic: we take the origin of investor sentiment as exogenous and focus on its empirical effects. We show that it is quite possible to measure investor sentiment and that waves of sentiment have clearly discernible, important, and regular effects on individual firms and on the stock market as a whole. The top-down approach builds on the two broader and more irrefutable assumptions of behavioral finance -- sentiment and the limits to arbitrage -- to explain which stocks are likely to be most affected by sentiment. In particular, stocks that are difficult to arbitrage or to value are most affected by sentiment.

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2,147 citations

Journal Article•DOI•

A test of the efficiency of a given portfolio

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Michael R. Gibbons, Stephen A. Ross, Jay Shanken

01 Sep 1989-Econometrica

TL;DR: In this article, a test for the ex ante efficiency of a given portfolio of assets is analyzed, and the sensitivity of the test to the portfolio choice and to the number of assets used to determine the ex post mean-variance efficient frontier is analyzed.

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Abstract: A test for the ex ante efficiency of a given portfolio of assets is analyzed. The relevant statistic has a tractable small sample distribution. Its power function is derived and used to study the sensitivity of the test to the portfolio choice and to the number of assets used to determine the ex post mean-variance efficient frontier. Several intuitive interpretations of the test are provided, including a simple mean-standard deviation geometric explanation. A univariate test, equivalent to our multivariate-based method, is derived, and it suggests some useful diagnostic tools which may explain why the null hypothesis is rejected. Empirical examples suggest that the multivariate approach can lead to more appropriate conclusions than those based on traditional inference which relies on a set of dependent univariate statistics.

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2,129 citations

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

...The GRS test statistic has better small sample properties than the Wald, Lagrange multiplier, and likelihood ratio tests (Gibbons et al., 1989)....
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Journal Article•DOI•

A model of investor sentiment1We are grateful to the NSF for financial support, and to Oliver Blanchard, Alon Brav, John Campbell (a referee), John Cochrane, Edward Glaeser, J.B. Heaton, Danny Kahneman, David Laibson, Owen Lamont, Drazen Prelec, Jay Ritter (a referee), Ken Singleton, Dick Thaler, an anonymous referee, and the editor, Bill Schwert, for comments.1

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Nicholas Barberis, Andrei Shleifer, Robert W. Vishny

01 Sep 1998-Journal of Financial Economics

2,083 citations