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Does investor sentiment really matter?

Chau, F. and Deesomsak, R. and Koutmos, D. (2016) 'Does investor sentiment really matter?', International review of financial analysis., 48 . pp. 221-232.

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.

Item Type:Article
Full text:(AM) Accepted Manuscript
Available under License - Creative Commons Attribution Non-commercial No Derivatives.
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Status:Peer-reviewed
Publisher Web site:http://dx.doi.org/10.1016/j.irfa.2016.10.003
Publisher statement:© 2016. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/
Date accepted:17 October 2016
Date deposited:21 October 2016
Date of first online publication:18 October 2016
Date first made open access:18 April 2018

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