Advertisement

Measuring Investor Sentiment in Equity Markets

  • Arindam Bandopadhyaya
  • Anne Leah Jones
Chapter

Abstract

Traditional research on asset pricing has focused on fundamental, firm-specific and economy-wide factors that affect asset prices. Recently, however, some researchers have turned to investor psychology to explain asset-price behaviour. It was previously assumed that there is little correlation among the sentiments of investors. The differing sentiments thus offset each other, and there is no resulting effect on market prices. If, however, there is enough of a consensus among investors, their viewpoints will not offset and will instead become an integral part of the price-setting process. In fact, some researchers (eg Eichengreen and Mody 1998) suggest that a change in one set of asset prices may, especially in the short run, trigger changes elsewhere, because such a change engenders shifts in the market’s attitude towards risk (ie because there is a change in investor sentiment). Such shifts in risk attitudes may explain short-term movements in asset prices better than any other set of fundamental factors (eg see Baek et al. (2005). Other studies have also recognised that investor sentiment may be an important component of the market pricing process (see Fisher and Statman, 2000; Baker and Wurgler, 2006).

Keywords

Asset Price Mutual Fund Equity Market Investor Sentiment Risk Appetite 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Baek, I.-M., Bandopadhyaya, A. and Du, C. (2005), ‘Determinants of Market Assessed Sovereign Risk: Economic Fundamentals or Market Risk Appetite?’ Journal of International Money and Finance, 24(4), 533–48.CrossRefGoogle Scholar
  2. Baker, M. and Stein, J. (2002) ‘Market Liquidity as a Sentiment Indicator’, Harvard Institute Research Working Paper, No. 1977.CrossRefGoogle Scholar
  3. Baker, M. and Wurgler, J. (2006) ‘Investor Sentiment and the Cross- section of Stock Returns’, Journal of Finance, 61(4), forthcoming.Google Scholar
  4. Branch, B. (1976) ‘The Predictive Power of Stock Market Indicators’, Journal of Financial and Quantitative Analysis, 11(2), 269–86.CrossRefGoogle Scholar
  5. Charoenrook, A. (2003) ‘Change in Consumer Sentiment and Aggregate Stock Market Returns’, Working Paper, The Owen Graduate School of Management, Vanderbilt University.Google Scholar
  6. Chopra, N., Lee, C. M. C., Schleifer, A. and Thaler, R. H. (1993) ‘Yes, Discounts on Closed-End Funds Are a Sentiment Index’, Journal of Finance, 48, 801–8.CrossRefGoogle Scholar
  7. Dennis, P. and Mayhew, S. (2002) ‘Risk-Neutral Skewness: Evidence from Stock Options’, Journal of Financial & Quantitative Analysis, 37(3), 471–93.CrossRefGoogle Scholar
  8. Eichengreen, B. and Mody A. (1998) ‘Interest Rates in the North and Capital Flows to the South: Is There a Missing Link?’, International Finance, 1(1), 35–58.CrossRefGoogle Scholar
  9. Fisher, K. L. and Statman, M. (2000) ‘Investor Sentiment and Stock Returns’, Financial Analysts Journal, 56(2), 16–23.CrossRefGoogle Scholar
  10. Fisher, K. L. and Statman, M. (2003) ‘Consumer Confidence and Stock Returns’, Journal of Portfolio Management, 30(1), 115–28.CrossRefGoogle Scholar
  11. Gup, B. E. (1973) ‘A Note on Stock Market Indicators and Stock Prices’, Journal of Financial & Quantitative Analysis, 8(4), 673–85.CrossRefGoogle Scholar
  12. Harvey, A. C. (1990) The Econometric Analysis of Time Series, The MIT Press, Cambridge, MA.Google Scholar
  13. Keim, D. B. and Madhavan, A. (2000) ‘The Relation between Stock Market Movements and NYSE Seat Prices’, Journal of Finance, 55(6), 2817–41.CrossRefGoogle Scholar
  14. Kumar, M. S. and Persaud, A. (2002) ‘Pure Contagion and Investors’ Shifting Risk Appetite: Analytical Issues and Empirical Evidence’, International Finance, 5(3), 401–36.CrossRefGoogle Scholar
  15. Lashgari, M. (2000) ‘The Role of TED Spread and Confidence Index in Explaining the Behavior of Stock Prices’, American Business Review, 18(2), 9–11.Google Scholar
  16. Lee, C., Schleiler, A. and Thaler, R. H. (1991) ‘Investor Sentiment and the Closed-End Fund Puzzle’, Journal of Finance, 46, 75–109.CrossRefGoogle Scholar
  17. Neal, R. and Wheatley S. M. (1998) ‘Do Measures of Investor Sentiment Predict Returns?’, Journal of Financial & Quantitative Analysis, 33(4), 523–48.CrossRefGoogle Scholar
  18. Persaud, A. (1996) Investors’ Changing Appetite for Risk, J.P. Morgan Securities Ltd., Global FX Research.Google Scholar
  19. Randall, M. R., Suk, D. Y. and Tully S. W. (2003) ‘Mutual Fund Cash Flows and Stock Market Performance’, Journal of Investing, 12(1), 78–81.CrossRefGoogle Scholar
  20. Whaley, R. E. (2000) ‘The Investor Fear Gauge’, Journal of Portfolio Management, 26(3).Google Scholar

Copyright information

© The Editor(s) 2016

Authors and Affiliations

  • Arindam Bandopadhyaya
    • 1
    • 2
  • Anne Leah Jones
    • 1
    • 2
    • 3
  1. 1.Accounting and Finance DepartmentUMASS-BostonUSA
  2. 2.College of Management’s Finance Services ForumUSA
  3. 3.Accounting and Finance Department, College of ManagementUniversity of MassachusettsBostonUSA

Personalised recommendations