Skip to main content

Research Repository

Advanced Search

Does investor sentiment really matter?

Chau, F.; Deesomsak, R.; Koutmos, D.

Does investor sentiment really matter? Thumbnail


Authors

D. Koutmos



Abstract

We examine the role sentiment plays and its manifestation in the trading behavior of investors in the U.S. stock market. Our findings support the notion that sentiment-induced buying and selling is an important determinant of stock price variation. While ‘classical’ asset pricing categorizes investors who trade in ways not consistent with mean-variance optimization as ‘irrational,’ we show that this traditional view should not hastily be evoked to characterize sentiment-driven investing. We instead show that sentiment-driven investors can trade against the herd and sell when prices are overinflated as a result of over-bullishness and vice versa. The asset pricing implications of this paper are that sentiment is linked to shifts in risk tolerance and this triggers contrarian-type behavior. In sum, we uncover the following regarding the behavior of sentiment-driven investors; firstly, they are more apt to trade on survey-based indicators rather than market-based indicators. Secondly, they trade on the basis of information extracted from individual, rather than institutional, investor surveys. Thirdly, they respond asymmetrically to shifts in sentiment and trade more aggressively during periods of declining sentiment. Finally, there is asymmetry in the role of sentiment with respect to business conditions whereby such buying and selling is more pronounced during bear markets.

Citation

Chau, F., Deesomsak, R., & Koutmos, D. (2016). Does investor sentiment really matter?. International Review of Financial Analysis, 48, 221-232. https://doi.org/10.1016/j.irfa.2016.10.003

Journal Article Type Article
Acceptance Date Oct 17, 2016
Online Publication Date Oct 18, 2016
Publication Date Dec 1, 2016
Deposit Date Oct 19, 2016
Publicly Available Date Mar 29, 2024
Journal International Review of Financial Analysis
Print ISSN 1057-5219
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 48
Pages 221-232
DOI https://doi.org/10.1016/j.irfa.2016.10.003
Public URL https://durham-repository.worktribe.com/output/1402561

Files




You might also like



Downloadable Citations