Dissertation•
The role of investor sentiment in asset pricing
01 Jan 2012-
TL;DR: In this paper, the role of investor sentiment as a risk factor was investigated in asset pricing of stock market and its explanatory power captured the financial market anomalies such as the size, value, liquidity, and effects.
Abstract: This thesis investigates various roles that investor sentiment may play in asset pricing The empirical analysis consists of three main parts based on the role of investor sentiment in the stock markets The first part discusses the role of investor sentiment as conditioning information It aims to examine its ability to explain the dynamic nature of the expected returns for individual stocks and its explanatory power capture the financial market anomalies such as the size, value, liquidity, and effects The second part focuses on the role of investor sentiment as a risk factor The purpose is to construct a risk factor on the basis of investor sentiment and test whether this proposed sentiment factor is priced and helps to explain the aforementioned financial market anomalies The third part explores the role of investor sentiment in different international stock markets It attempts to assess the extent to which investor sentiment affects the stock market volatility and returns of different regions
The results suggest that investor sentiment exhibits explanatory power for cross section of stock returns in the US market Acting as conditioning information or a risk factor, investor sentiment can generally capture the size and value effects Furthermore, it can also capture the momentum effect under certain model specifications The thesis shows that investors require compensation for bearing noise traders; in other words, investor sentiment is a priced factor At the market level, the impacts of investor sentiment on stock volatility and returns vary across countries For some countries investor sentiment affects both volatility and returns while for the others investor sentiment has less influence on stock price behaviour
Overall, the findings of the thesis provide empirical evidence that overlooking the role of investor sentiment in classical finance theory could lead to an imperfect picture of describing the stock price behaviour
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Journal Article•
TL;DR: Wang et al. as mentioned in this paper investigated whether investor sentiment affects the cross-section of stock returns in China A-share market and found that the sensitivity of stock return to sentiment changes is different.
Abstract: We investigate whether investor sentiment affects the cross-section of stock returns in China A-share market.The evidence shows that the sensitivity of stock returns to sentiment changes is different. When an index of investor sentiment takes high values,low tangible assets,high Debt-asset ratio,and non-dividend-paying stocks earn relatively higher returns,when sentiment is low,the aforementioned categories of stocks earn relatively lower returns.When sentiment is high,low-price,unprofitable and high book-market ratio stocks earn relatively higher returns and vice versa,but which is insignificant.The capitalization, volatility and institutional ownership appear to have no significant cross-section effect of investor sentiment on its characteristic Portfolio return.
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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
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
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.
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.
14,517 citations
"The role of investor sentiment in a..." refers background or methods in this paper
...For example, Fama and French (1992) argue that value stocks are fundamentally riskier than growth stocks....
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...The analysis only includes stocks with positive B/M as in Fama and French (1992)....
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...The first two years of COMPUSTAT data for every firm are dropped to control for the COMPUSTAT survival bias as in Fama and French (1992) and Kothari, Shanken, and Sloan (1995)....
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...…for risk, researchers later find stocks with high book-to- market ratios (B/M) or dividend yields (D/P) outperform those with low B/M or D/P. Fama and French (1992) divide stocks listed on the NYSE, AMEX, and NASDAQ over 1963-1990 into 10 portfolios each year based on their B/M ratios,…...
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...Similarly, after controlling for risk, researchers later find stocks with high book-to- market ratios (B/M) or dividend yields (D/P) outperform those with low B/M or D/P. Fama and French (1992) divide stocks listed on the NYSE, AMEX, and NASDAQ over 1963-1990 into 10 portfolios each year based on their B/M ratios, and then calculate the average return of each portfolio over the next year....
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TL;DR: In this article, the relationship between average return and risk for New York Stock Exchange common stocks was tested using a two-parameter portfolio model and models of market equilibrium derived from the two parameter portfolio model.
Abstract: This paper tests the relationship between average return and risk for New York Stock Exchange common stocks. The theoretical basis of the tests is the "two-parameter" portfolio model and models of market equilibrium derived from the two-parameter portfolio model. We cannot reject the hypothesis of these models that the pricing of common stocks reflects the attempts of risk-averse investors to hold portfolios that are "efficient" in terms of expected value and dispersion of return. Moreover, the observed "fair game" properties of the coefficients and residuals of the risk-return regressions are consistent with an "efficient capital market"--that is, a market where prices of securities
14,171 citations