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Asymmetric Relationship between Investors' Sentiment and Stock Returns: Evidence from a Quantile Non†causality Test

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  • Haiqi Li
  • Yu Guo
  • Sung Y. Park

Abstract

This study investigates the causal relationship between investor sentiment and stock returns in the USA by conducting a quantile Granger non†causality test. Employing two proxies for investor sentiment – the sentiment index developed by Baker and Wurgler in 2007 and the University of Michigan Consumer Survey, a consumer confidence index – we find that the causal relationship between investor sentiment and stock returns strengthens when a tail quantile interval is considered. This finding implies that the investor sentiment could provide the incremental predictability for the stock returns under the extreme market situation, which cannot be found using a traditional Granger causality test. Interestingly, the findings can be explained by investors' loss aversion and herding behavior.

Suggested Citation

  • Haiqi Li & Yu Guo & Sung Y. Park, 2017. "Asymmetric Relationship between Investors' Sentiment and Stock Returns: Evidence from a Quantile Non†causality Test," International Review of Finance, International Review of Finance Ltd., vol. 17(4), pages 617-626, December.
    • Handle: RePEc:bla:irvfin:v:17:y:2017:i:4:p:617-626
    DOI: 10.1111/irfi.12120
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    Citations

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    Cited by:

    1. Ahmed, Bouteska, 2020. "Understanding the impact of investor sentiment on the price formation process: A review of the conduct of American stock markets," The Journal of Economic Asymmetries, Elsevier, vol. 22(C).
    2. Yong Jiang & Zhongbao Zhou, 2018. "Does the time horizon of the return predictive effect of investor sentiment vary with stock characteristics? A Granger causality analysis in the frequency domain," Papers 1803.02962, arXiv.org.
    3. Jiang, Yong & Ren, Yi-Shuai & Narayan, Seema & Ma, Chao-Qun & Yang, Xiao-Guang, 2022. "Heterogeneity dependence between oil prices and exchange rate: Evidence from a parametric test of Granger causality in quantiles," The North American Journal of Economics and Finance, Elsevier, vol. 62(C).
    4. Emre Cevik & Buket Kirci Altinkeski & Emrah Ismail Cevik & Sel Dibooglu, 2022. "Investor sentiments and stock markets during the COVID-19 pandemic," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-34, December.
    5. Zorio-Grima, Ana & Merello, Paloma, 2020. "Consumer confidence: Causality links with subjective and objective information sources," Technological Forecasting and Social Change, Elsevier, vol. 150(C).
    6. Hela Namouri & Fredj Jawadi & Zied Ftiti & Néjib Hachicha, 2018. "Threshold effect in the relationship between investor sentiment and stock market returns: a PSTR specification," Applied Economics, Taylor & Francis Journals, vol. 50(5), pages 559-573, January.
    7. Pham, Linh & Cepni, Oguzhan, 2022. "Extreme directional spillovers between investor attention and green bond markets," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 186-210.
    8. Ngoc Bao Vuong, Yoshihisa Suzuki, 2020. "Does Fear has Stronger Impact than Confidence on Stock Returns?The Case of Asia-Pacific Developed Markets," Analele Stiintifice ale Universitatii "Alexandru Ioan Cuza" din Iasi - Stiinte Economice, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 67, pages 157-175, July.
    9. Naeem, Muhammad Abubakr & Farid, Saqib & Faruk, Balli & Shahzad, Syed Jawad Hussain, 2020. "Can happiness predict future volatility in stock markets?," Research in International Business and Finance, Elsevier, vol. 54(C).
    10. Golab, Anna & Bannigidadmath, Deepa & Pham, Thach Ngoc & Thuraisamy, Kannan, 2022. "Economic policy uncertainty and industry return predictability – Evidence from the UK," International Review of Economics & Finance, Elsevier, vol. 82(C), pages 433-447.
    11. Yousra Trichilli & Mouna Abdelhédi & Mouna Boujelbène Abbes, 2020. "The thermal optimal path model: Does Google search queries help to predict dynamic relationship between investor’s sentiment and indexes returns?," Journal of Asset Management, Palgrave Macmillan, vol. 21(3), pages 261-279, May.
    12. Raquel M. Gaspar & Xu Jiaming, 2023. "Consumer Confidence and Stock Markets' Returns," Working Papers REM 2023/0292, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    13. Gizelle D. Willows & Daniel W. Richards, 2023. "Buy and buy again: The impact of unique reference points on (re)purchase decisions," International Review of Finance, International Review of Finance Ltd., vol. 23(2), pages 301-316, June.

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