Investor sentiment and the risk–return tradeoff in the Brazilian market

Piccoli, Pedro; Costa, Newton C. A. da; Silva, Wesley Vieira da; Cruz, June Alisson Westarb

doi:10.1111/acfi.12342

Cited by 20 publications

(19 citation statements)

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“…Also, other irrational traders trade in concert in these high sentiment periods. This is consistent with the finding of a deterioration of the risk-return relationship in high sentiment periods due to the impact of less sophisticated noise traders (Antoniou et al, 2015;Kim, Kim, & Seo, 2017;Piccoli, Da Costa, Da Silva, & Cruz, 2018).…”

Section: Literature Reviewsupporting

confidence: 91%

Investor sentiment and stock return volatility: Evidence from the Johannesburg Stock Exchange

Rupande

Muguto

Muzindutsi

2019

Cogent Economics & Finance

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Volatility is an important component of asset pricing; an increase in volatility on markets can trigger changes in the risk distribution of financial assets. In conventional financial theory, investors are considered to be rational and any changes in relevant risk are assumed to be a result of the movement in fundamental factors. However, herein this study, it is hypothesized that there are movements in risk that are driven by volatility linked to sentiment-driven noise trader activity whose patterns are irreconcilable with changes in fundamental factors. This assertion is tested using a daily sentiment composite index constructed from a set of proxies and Generalised Autoregressive Conditional Heteroscedasticity models on the South African market over a period spanning July 2002 to June 2018. The results show that there is a significant connection between investor sentiment and stock return volatility which shows that behavioural finance can significantly explain the behaviour of stock returns on the Johannesburg Stock Exchange. It is, thus, recommended that due to the inadequacies of popular asset pricing models such as the Capital Asset Pricing Model, consideration should be made towards augmenting these asset pricing models with a sentiment risk factor.

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Section: Literature Reviewsupporting

confidence: 91%

Investor sentiment and stock return volatility: Evidence from the Johannesburg Stock Exchange

Rupande

Muguto

Muzindutsi

2019

Cogent Economics & Finance

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“…Regarding companies' characteristics, Baker and Wurgler (2006) observed that companies that have characteristics associated with difficult pricing are evaluated in a non-homogenous way, allowing investor's sentiment to interfere with greater intensity in their pricing. In this sense, previous studies confirmed that, in some markets, the investor sentiment is more significant to explain the volatility of new companies in terms of listing, with a smaller size, higher growth pattern, and other characteristics that may cause uncertainties in their valuation compared to other companies (Baker & Wurgler, 2006, 2007Piccoli et al, 2018).…”

Section: Introductionmentioning

confidence: 74%

“…It can be impacted by quantitative and qualitative information, according to its value relevance (Galdi & Gonçalves, 2018). In view of the difficulty of traditional models in explaining market volatility, new factors are gaining importance, being investor sentiment one of these factors (Piccoli, Costa, Silva, & Cruz, 2018). After the 1980s, the literature started to consider that certain phenomena and market patterns, defined as anomalies, could be explained by peaks of investor irrationality driven by his/her sentiment.…”

Section: Introductionmentioning

confidence: 99%

“…In this study, asymmetry refers to the reduction, total or partial, of the explanatory capacity of the investors' sentiment about the volatility of the Brazilian stock market. This asymmetry can occur when two factors are considered: changes in the sentiment between optimistic and pessimistic and when specific companies characteristics associated with pricing difficulties are considered (Aydogan, 2017;Baker & Wurgler, 2006, 2007Kumari & Mahakud, 2015;Lee et al, 2002;Piccoli et al, 2018;Smales, 2016;Schneller et al, 2018;Yu & Yuan, 2011). , 22(4), eRAMF210208, 2021 doi:10.1590/1678-6971/eRAMF210208 The asymmetric behavior would appear, given that, in periods of optimistic sentiment, there is a higher entry of noise traders and lower volatility, while in periods of pessimistic sentiment, there is greater uncertainty and, consequently, greater volatility (De Long et al, 1990).…”

Section: Introductionmentioning

confidence: 99%

“…The sentiment proxy utilized can also be considered a differential of this study, as the index is based on market factors, filling an important gap pointed out in the literature (Piccoli et al, 2018) that deals with the weaknesses found in the use of proxies based on opinion research. Moreover, the present study sought to confirm whether the sentiment explanatory capacity changes when variations in companies' characteristics associated with difficulty pricing are considered, expanding the understanding of possible sensitivities that this relationship may have in the Brazilian stock market.…”

Section: Introductionmentioning

confidence: 99%

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Asymmetric Impact of Investor Sentiment on Brazilian Stock Market Volatility

Ferreira

Machado

Silva

2021

RAM, Rev. Adm. Mackenzie

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Purpose: The purpose of this study was to analyze the effect of investor sentiment on the volatility of the Brazilian stock market. Specifically, it aimed to identify if the asymmetric behavior of sentiment could be observed in emerging markets, considering companies that have characteristics that are difficult to price. Originality/value: Unlike most studies on investor sentiment, this study focuses on its impact on the stock market volatility, as well as on the characteristics of companies associated with difficult pricing. Design/methodology/approach: The volatility of the IBRX100 index was used to represent the Brazilian stock market, and as a proxy for investor sentiment it was selected Miranda's index (2018), based on market data. Data were estimated using the two-stage least squares (MQ2E) technique to address endogeneity problems. Finally, the volatility of companies with difficult-to-price characteristics was segregated to analyze their sensitivity to sentiment. Findings: The results indicate that sentiment has a negative and sig nificant relationship with the volatility of the Brazilian market, as well as evidences an asymmetrical behavior, being statistically stronger in pessimistic periods. Additional analyzes evidence that the explanatory sentiment capacity is sensitive to companies' characteristics, but only companies with a high book-to-market ratio showed asymmetric behavior, as expected by the literature. The portfolios segmented by size and illiquidity maintained an asymmetric behavior, but it was the volatility of the large companies and the less illiquid ones that were best explained by sentiment, indicating that the Brazilian market has distinctive characteristics in relation to developed markets.

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Unraveling the puzzling risk–return relationship: Distinctive roles of government involvement in venture capital investment

Zhang,

2024

Strategic Management Journal

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Research SummaryGovernment involvement plays a significant role in fostering entrepreneurship. We examine how government involvement in venture capital (VC) investments shapes the decoupling between risk‐taking and investment returns. We distinguish government involvement through state ownership (GVC) and personal political connections (connected VC). We theorize that government involvement through GVC is associated with the downside risk–return paradox, that is, concurrent higher risk‐taking and lower‐than‐expected returns. In contrast, government involvement through connected VCs is linked to the upside risk–return paradox, that is, concurrent lower risk‐taking and higher‐than‐expected returns. Our theoretical predictions receive general support from analyses using longitudinal data from VC firms in China. Our study sheds light on the heterogeneity in the decoupling between risk and return and the underlying mechanisms through which governments influence entrepreneurship.Managerial SummaryGovernments often seek to promote entrepreneurship; yet, their involvement in start‐ups tends to deviate from the conventional wisdom of a positive risk–return association. Government‐owned venture capital (VC) firms tend to take greater risks and invest in earlier‐stage start‐ups, but yield lower returns from their investments. Conversely, VC firms that have personal ties to government officials tend to take lower risks and prefer later‐stage start‐ups, yet achieve higher returns. These intriguing findings reveal the complexities of government participation in entrepreneurial activities and offer valuable insights for policy formulation. In addition, our findings highlight the importance for entrepreneurs to recognize diverse goals and resources in government involvement. Considering this when seeking external financing is helpful in positioning start‐ups for growth and success.

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Investor sentiment and the risk–return tradeoff in the Brazilian market

Cited by 20 publications

References 40 publications

Investor sentiment and stock return volatility: Evidence from the Johannesburg Stock Exchange

Investor sentiment and stock return volatility: Evidence from the Johannesburg Stock Exchange

Asymmetric Impact of Investor Sentiment on Brazilian Stock Market Volatility

Unraveling the puzzling risk–return relationship: Distinctive roles of government involvement in venture capital investment

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