Does Sentiment Matter for Stock Market Returns? Evidence from a Small European Market

Abstract

An important issue in finance is whether noise traders, those who act on information that has no value, influence prices. Recent research indicates that investor sentiment affects the return distribution of a few categories of assets in some stock markets. Other studies also document that US investor sentiment is contagious. This paper investigates whether Consumer Confidence (CC) and the Economic Sentiment Indicator (ESI) -as proxies for investor sentiment -affects Portuguese stock market returns, at aggregate and industry levels, for the period between 1997 to 2009. Moreover the impact of US investor sentiment on Portuguese stock market returns is also addressed. We find several interesting results. First, our results provide evidence that consumer confidence index and ESI are driven by both, rational and irrational factors. Second, ESI is significantly negative related to stock returns. Sentiment negatively forecasts aggregate stock market returns, but not all industry indices returns. Finally, we don't find a contagious effect of US investor sentiment in Portuguese market returns.JEL classification: G10, G11.

Optimism in Financial Markets: Stock Market Returns and Investor Sentiments

“…Finally, Fernandes, Gonçalves, and Vieira (Fernandes et al 2013) provide an examination of the "small" Portuguese stock market. Starting from the same hypothesis of the majority of the essays cited before, they investigate whether there exists predictability not only of aggregate stock returns, but also at industrial indices levels for Portugal, over the period 1997-2009.…”

“…From the economic point of view, this can be justified by the fact that Europe has not a strong financial impact comparable to the volumes of the U.S., which has been historically the leader of the worldwide markets. Fernandes, Gonçalves, and Vieira (Fernandes et al 2013) concluded that the Portuguese market has tendency to be affected by the sentiment, because of the high level of collectivism in the country. The herding is counterbalanced by the presence of institutional investors, which are considered as rational.…”

“…First, the majority of studies investigates this relationship with American stock markets, because of their financial significance and the higher likelihood to access the data. One of the few exception is (Fernandes et al 2013) that provide an examination of the Portuguese market. This paper would like to contribute to the literature by analysing and comparing a strong and stable market like the U.S. to a smaller one, but with economic significance, like Europe.…”

Housing Wealth, Financial Wealth and Consumption Expenditure: The Role of Consumer Confidence

“…It is the most widely followed measure of CC by financial analysts, the business community, policymakers and journalists (e.g. Fernandes et al 2013). Moreover, a majority of economic researchers have focused on the UMCSI because of its long history.…”

Subjective/ Behavioural Factors Influence the PSI 20 and IBEX 35

“…Regarding the Portuguese case, in a study analyzing the impact of sentiment on market returns in Portugal, using the return on the Portuguese stock market, Fernandes, Gonç alves & Vieira (2013) state that the Portuguese Economic Sentiment Indicator (ESI) and the European Union (EU) Consumer Confidence Index for Portugal are driven by rational and irrational factors. The authors only used the irrational component of sentiment, concluding that sentiment has a negative impact on future market returns and may be justified by the fact that Portugal is a market prone to the influence of sentiment as a result of its high degree of collectivism, revealing the extent to which individuals are driven to act in groups rather than individually (Hofstede, 2001).…”