Investor Sentiment and Asset Valuation

Cliff, Michael T.; Brown, Gregory W.

doi:10.2139/ssrn.292139

Cited by 264 publications

(394 citation statements)

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“…Their evidence suggests that sentiment effect is limited to small firm returns and returns exert mush stronger influence on sentiment indicators. However, in their follow up research [8], they establish that the lack of effect predictability of sentiment in the short run does not prevent it from affecting asset values in the long run. They show that high sentiment is followed by low cumulative long run returns as asset prices revert to their fundamental value.…”

Section: A Brief Review Of Literaturementioning

confidence: 99%

Swings in Sentiment and Stock Returns: Evidence from a Frontier Market

Rahman¹,

Shien²,

Sadique³

2013

IJTEF

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Abstract-We investigate the impact of noise trader sentiment on the formation of expected returns and volatility in the context of the frontier stock market of Bangladesh. Empirical results based on a GARCH-in-mean framework show that shifts in investor sentiment are significantly positively correlated with excess market returns. Evidence of this direct impact of changes in sentiment on expected returns is robust across sample periods and alternative measures of sentiment we use in the analysis. In addition, we find that the magnitude of bullish or bearish sentiment changes also exerts an indirect effect on expected returns through its asymmetric influence on the conditional volatility process. Overall, our results suggest that shifts in investor sentiment in the market represent a systematic risk factor that is priced in equilibrium.Index Terms-Investor sentiment, volatility, excess returns. I. INTRODUCTIONWe undertake an empirical investigation into the potential impact of trading behavior of uninformed investors on the stock price dynamics of a frontier stock market. Unlike that of informed investors, trading decisions of uninformed investors are driven by sentiment which is not justified by currently available fundamental information about future cash flows and investment risk.At least since John Maynard Keynes' [1] use of the analogy of a -beauty contest‖ to illustrate investor behavior, economists have pondered the ways in which agent sentiment can play out in the financial markets to move asset price away from fundamental value. Decades later, DeLong, Shleifer, Summers, and Waldmann [2] formalize the role of sentiment in a financial market which is populated by two categories of investors: informed traders who rationally anticipate asset value, and uninformed noise traders who experience waves of optimistic or pessimistic sentiment that is not fully justified by the facts about fundamentals at hand. They demonstrate how, aggregate demand shifts on the part of noise traders (as a result of their acting in concert) triggered by changes in sentiment can induce a systematic risk that is priced in equilibrium. In their model, noise trader sentiment is stochastic and the deviations in price from fundamental value created by changes in sentiment are unpredictable. As a result, now informed investors have to take into account not only fundamental risk of investment but also the risk that investor sentiment becomes even more extreme and prices move further away from fundamental values over the holding period. This additional risk, known as the noise trader risk, renders arbitrage activity risky and prevents risk-averse informed traders from taking fully offsetting positions to correct mispricing induced by noise trading. Consequently, noise trader risk represents an additional source of systematic risk that is priced in the market.So far a number of studies, mostly done in the context of US markets using a variety of sentiment proxies, have largely lent support to the implication of the DSSW model for asset pricin...

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Section: A Brief Review Of Literaturementioning

confidence: 99%

Swings in Sentiment and Stock Returns: Evidence from a Frontier Market

Rahman¹,

Shien²,

Sadique³

2013

IJTEF

View full text Add to dashboard Cite

show abstract

“…The results of Brown and Cliff (2005) showed that in large companies or companies with a low book-to-market ratio sentiment was significant in predicting future returns in 1, 2 and 3-year time horizons. However, small stocks seem to be less influenced by sentiment.…”

Section: Behavioural Effectsmentioning

confidence: 99%

“…Although there is not a consensus on the influence of investor sentiment in stock markets, several studies have documented that sentiment influences returns and valuation of assets [Fisher and Statman (2000), Brown and Cliff (2005), Wurgler (2006, 2007), Lemmon and Portniaguina (2006), Schmeling (2009)], volatility [Wang, Keswani and Taylor (2006)], the practices of information disclosure and market reaction to announcements [Bergman and Roychowdhury (2008), Mian and Sankaraguruswamy (2008)]. Fisher and Statman (2000) analyzed the relationship between sentiment and future returns as well as the relationship between changes in sentiment and future returns.…”

Section: Behavioural Effectsmentioning

confidence: 99%

“…Shefrin (2001) has demonstrated that stock price variation could be broken down into two stochastic processes, one pertaining to fundamentals and the other to sentiment. Brown and Cliff (2005) used survey data on investor sentiment. These data are from Investor's Intelligence (II) (which tracks the number of market newsletters that are bullish, bearish or neutral) and showed that sentiment affected asset pricing.…”

Section: Behavioural Effectsmentioning

confidence: 99%

“…Thus, several researchers have investigated the effect of investor sentiment in asset pricing patterns, such as: DeBondt and Thaler (1985), DeBondt (1998), Fisher and Statman (2000), Shefrin (2001), Brown and Cliff (2005) Wurgler (2006 and2007), Lemmon and Portniaguina (2006), Wang, Keswani and Taylor (2006) and Schmeling (2009), among others.…”

Section: Introductionmentioning

confidence: 99%

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

Fernandes

Goncalves

Vieira

2013

Journal of Behavioral Finance

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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.

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Investor Beliefs and the Demand Pressure on Index Options in Taiwan

Pan

Shiu

2014

Journal of Futures Markets

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The effects of demand pressure on option prices have already been well documented within the extant literature; however, little appears to be known with regard to where the demand pressure on options originates. We set out in the present study to examine the ways in which investor beliefs affect the demand pressure on TAIEX options, employing forward‐looking risk‐neutral index distributions to evaluate such beliefs. Our examination of 2005–2012 high‐frequency data reveals that with an increase in the level of market fear amongst investors, there will be a corresponding rise in the demand for options, with greater pessimism amongst investors resulting in weaker (stronger) demand for calls (puts). Furthermore, during the 2008 financial crisis, the soaring market atmosphere, and the fears of a market crash which soon followed, clearly had dominating effects on demand pressure, with an increase (reduction) in demand pressure for call (put) options being discernible during the bullish sentiment period, and vice versa amid the subsequent fears of a market crash. © 2014 Wiley Periodicals, Inc. Jrl Fut Mark 35:1117–1132, 2015

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Investor Sentiment and Asset Valuation

Cited by 264 publications

References 40 publications

Swings in Sentiment and Stock Returns: Evidence from a Frontier Market

Swings in Sentiment and Stock Returns: Evidence from a Frontier Market

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

Investor Beliefs and the Demand Pressure on Index Options in Taiwan

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