The Impact of Investor Sentiment on the German Stock Market

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThis paper develops a broad-based sentiment indicator for Germany and investigates whether investor sentiment can explain stock returns on the German stock market. Based on a principal component analysis, we construct a sentiment indicator that condenses information of several well-known sentiment proxies. We show that this indicator explains the return spread between sentiment sensitive stocks and stocks that are not sensitive to sentiment fluctuations. Specifically, stocks that are difficult to arbitrage and hard to value are sensitive to the indicator. However, we do not find much predictive power of sentiment for future stock returns. JEL-Classification Codes: G12, G14 AbstractThis paper develops a broad-based sentiment indicator for Germany and investigates whether investor sentiment can explain stock returns on the German stock market. Based on a principal component analysis, we construct a sentiment indicator that condenses information of several well-known sentiment proxies. We show that this indicator explains the return spread between sentiment sensitive stocks and stocks that are not sensitive to sentiment fluctuations. Specifically, stocks that are difficult to arbitrage and hard to value are sensitive to the indicator. However, we do not find much predictive power of sentiment for future stock returns. JEL-Classification Codes: G12, G14

Exploring relation between Indian market sentiments and stock market returns

“…Some studies have developed a composite index with a combination of direct and indirect measures (Finter et al, 2012).With both the measures being widely used as IS proxies and giving mixed results, it becomes difficult to define which measure is the most accurate measure. Moreover both the measures pose challenges of implementing in different geographies with unique investor profiles and demographics.…”

“…With ease of data availability on small investors, high involvement of individual in stock market activity and assumption of small investors as noise traders, the proxies for IS studies on US markets, have focused on explaining and predicting stock markets by analyzing individual retail investor behavior (Kling and Gao, 2008). The robustness of IS proxies developed for US market needs to be examined in markets of developing countries characterized by different investor profile (Finter et al, 2012). Being a developing economy, Indian capital markets have different characteristics compared with developed markets like US.…”

Investor Sentiment and Idiosyncratic Volatility Puzzle: Evidence from the Chinese Stock Market.

“…In contrast, where institutional investors dominate the market, such as in developed stock markets, the risk associated with investor sentiment reduces. For example, Finter et al [25] indicate that investor sentiment has little importance in the German stock market that has a low fraction of retail investors. This is an indication that investor sentiment has an impact on stock prices in the emerging stock markets [17].…”

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“…They identified six proxies of IS which could explain the variation in stock returns. Their approach of developing a composite index has been adopted in many studies including those of (Chen et al, 2010), (Finter et al, 2012) and (Chen et al, 2014) for developed markets of US, Hong Kong, Germany, France, Canada, Japan etc. Apart from the composite sentiment index, market performance indices have also developed to measure IS.…”