Overreaction, Investor Sentiment and Market Sentiment of COVID-19

Abstract

This study examines the impact of investor sentiment and market sentiment on overreaction in Europe and USA markets before and during COVID-19. The investor sentiment is calculated by the standard deviation, realized volatility, Parkinson’s estimator and Garman and Klass’s estimator. The market sentiment is measured by Business Confidence Index, Consumer Confidence Index, Labour Force Survey, Leading Index and Monetary Aggregates. The results of this study show that investor and market sentiments are correlated to stock return before COVID-19. Nonetheless, realized volatility is the only investor sentiment that is significant with the emergence of COVID-19. It shows that investors rely on the previous day’s stock prices to trade under market uncertainty. Market sentiment is observed to be insignificant in the pandemic. Furthermore, the existence of overreaction is detected in European portfolios but no evidence of overreaction is shown in the USA during pre-COVID-19. Surprisingly, overreaction is observed in Europe and USA markets in the pandemic. The USA market has a higher overreaction tendency than Europe. The results of this study assist academicians, practitioners and investors in understanding and creating awareness of the existence of market overreaction and its determinants before and during COVID-19.

The game of lies by stock investors in social media: a study based on city lockdowns in China

“…The extensive influence of COVID-19 globally illustrates the wide-ranging effects of a significant societal event, either directly or indirectly. Many studies have confirmed the direct or indirect effects of COVID-19 on financial markets and investor sentiment (Goel and Dash 2022;Loang 2022). These effects are likely to result in changes to the integrity factor, subsequently affecting the outcomes of the game of lies among investors on social media.…”

A retail investor in a cobweb of social networks

“…[29] examined the role of trading volume and volatility in the Russian stock market. [32] measured the investor sentiment by different metrics of volatility: the standard deviation, realized volatility, Parkinson's estimator and Garman and Klass's estimator. The author revealed that realized volatility is the only investor sentiment indicator that significantly impacts on stock returns with the emergence of COVID-19 in the EU and US markets.…”

“…Trading volume [4,15,28,31] Extreme past returns [4,15] Volatility [32,51] Intensity of web search queries for companies (in Google, Wikipedia, etc.) [15,16] Survey sentiment indicators [14] The tone of messages in social networks [14,36,41] Divergence of investor opinion [13] Author-developed indices based on the tone of investor messages and divergence of opinion (Bull-Bear Spread, Bullishness Index, Agreement Index, Variation of Bullish Ratio, etc.)…”