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Investor sentiment in the equity market and investments in corporate-bond funds

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  • Islam, Mohd. Anisul

Abstract

This study explores the relation between investor sentiment in equity market and investments in corporate-bond funds. Investors tend to move into and out of corporate-bond funds when contemporaneous sentiment in equity market differs from the historical average. Specifically, a one-standard-deviation decrease in equity-market sentiment generates 0.1% and 0.4% inflows for active and index funds, respectively. It reflects the time-varying flight-to-safety behavior of investors. Besides, funds with low exposure to equity-market sentiment appear to attract inflows and funds with high exposure to equity-market sentiment experience outflows, indicating that investors are likely to avoid sentiment risk. Morever, the result shows that funds with the highest negative sentiment exposure significantly outperform the funds with the highest positive sentiment exposure by 2.22%–2.52% per annum. The results are robust to using alternative sentiment metrics and considering different subperiods.

Suggested Citation

  • Islam, Mohd. Anisul, 2021. "Investor sentiment in the equity market and investments in corporate-bond funds," International Review of Financial Analysis, Elsevier, vol. 78(C).
    • Handle: RePEc:eee:finana:v:78:y:2021:i:c:s1057521921002246
    DOI: 10.1016/j.irfa.2021.101898
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    Cited by:

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    3. Dhasmana, Samriddhi & Ghosh, Sajal & Kanjilal, Kakali, 2023. "Does investor sentiment influence ESG stock performance? Evidence from India," Journal of Behavioral and Experimental Finance, Elsevier, vol. 37(C).
    4. Chen, Yuan & Han, Dongmei & Zhou, Xiaofeng, 2023. "Mining the emotional information in the audio of earnings conference calls : A deep learning approach for sentiment analysis of securities analysts' follow-up behavior," International Review of Financial Analysis, Elsevier, vol. 88(C).

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    More about this item

    Keywords

    Investor sentiment; Corporate-bond fund; Flight-to-quality; Sentiment beta; Fund performance;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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