Investor Sentiment, Portfolio Returns, and Macroeconomic Variables

Abstract

Investor sentiment is an important aspect of behavioural finance, which provides explanation of anomalies to the asset’s intrinsic values. Sentiments can easily affect individual investors. Historically, Australia is regarded as rich in resources but poor in capital, and this motivates the paper to further study and compare the effects of investor sentiment on performance returns. Aggregate and cross-sectional effects, as well as predictive regression analysis to forecast the relationships, while controlling for the macroeconomic variables, are used by employing Consumer Confidence Index (CCI) and trade volume as sentiment proxies. Contrary to some studies with aggregate stock markets, it is discovered that in the short term, investor sentiment poses a positive impact with strong predictive power on the forecast of portfolio returns but not so much in the long run, which supports the classical theories of rational investors. In both Australian and New Zealand markets, the sentiment proxies also cannot predict the returns portfolios with dividends in the long/short portfolio and book-to-market ratio long/short portfolio.

Impact of Investor Sentiment on Contemporaneous and Future Equity Returns in Emerging Markets

“…Two proxies (a) Trading Volume (as used by Baker & Stein, 2004; Banchit et al, 2020) and (b) Turnover Ratio (as used by Baker & Wurgler, 2006) are used to quantify the investor sentiment index by using the PCA approach of Baker and Wurgler (2006, 2007) by using the equations:…”

“…Where ln is the natural log, R t is the return of daily prices of the selected index, P t is the price of the selected index at time t, P tÀ1 is the price of the selected index at first lag. Two proxies (a) Trading Volume (as used by Baker & Stein, 2004;Banchit et al, 2020) and (b) Turnover Ratio (as used by Baker & Wurgler, 2006) are used to quantify the investor sentiment index by using the PCA approach of Wurgler (2006, 2007)…”

Predictive effect of investor sentiment on current and future returns in emerging equity markets

“…Irrespective of time, no correlation between investor sentiment and returns was observed [ 13 , 15 – 17 , 46 , 47 ]. Whereas, with reference to time, investor sentiment was found an unreliable indicator of stock returns, in the short term [ 32 , 36 , 48 , 49 ] as well as in the long term [ 14 , 30 , 50 , 51 ]. In terms of directionality, the link between investor sentiment and subsequent market returns in the short term was positive [ 35 , 52 – 56 ] as well as negative [ 31 , 57 ].…”

“…A broad spectrum of literature focuses on the relationship between investor sentiment and equity market returns with reference to time; some find this relationship significant in the long term [24][25][26], while others find it important in the short term [27][28][29][30][31]. Similarly, investor sentiment is found insignificant predictor of equity market returns in the short-term [32,33] and in the long-term [14], [30,34]. When the direction of the association between the predictive power of investor sentiment and returns is focused, contradictory results are observed.…”

Factors Influencing Dividend Payment Decisions: A Case of Mutual Funds in Tanzania

“…Dividend payment decision is also affected by market risks including inflation, exchange rate and interest rate movement (Banchit, Abidin, Lim & Morni, 2020).These macroeconomic variables intent to distort cash inflows. Thus discounting for these macroeconomic changes/risks is a mandatory managerial practice.…”