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The effect of US individual investor sentiment on industry‐specific stock returns and volatility

Author

Listed:
  • Mustafa Sayim
  • Pamela D. Morris
  • Hamid Rahman

Abstract

Purpose - This paper examines the effect of rational and irrational investor sentiment on the stock return and volatility of US auto, finance, food, oil and utility industries. Design/methodology/approach - The American Association of Individual Investors Index (AAII) is used as a proxy for US individual investor sentiment. The US market fundamentals are regressed on investor sentiment in order to capture the effect of macroeconomic risk factors on investor sentiment. Then impulse response functions (IRFs) are generated from a VAR model to investigate the effect of unanticipated movements in US investor sentiment on both industry‐specific stock return and volatility. Findings - The results show a significant impact of investor sentiment on stock return and volatility in all the industries. We find that the positive rational component of US individual investor sentiment tends to increase the stock return in these industries. We also document that unanticipated increase in the rational component of US individual investor sentiment has a significant negative impact only on the industry volatilities of US auto and finance industries. Research limitations/implications - The results are based only on the 1999 – 2010 US industry‐specific stock return and volatility data and are confined to these industries. Practical implications - The findings of this paper can help investors to improve their asset return generating models by incorporating investor sentiment. The findings can also help policymakers to design policies that stabilize sentiment and reduce volatility and uncertainty in the stock markets. Originality/value - This paper adds to the growing literature on behavioral finance by filling a gap and addressing the impact of investor sentiment in the various US industries.

Suggested Citation

  • Mustafa Sayim & Pamela D. Morris & Hamid Rahman, 2013. "The effect of US individual investor sentiment on industry‐specific stock returns and volatility," Review of Behavioral Finance, Emerald Group Publishing Limited, vol. 5(1), pages 58-76, September.
    • Handle: RePEc:eme:rbfpps:v:5:y:2013:i:1:p:58-76
    DOI: 10.1108/RBF-01-2013-0006
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    Citations

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    Cited by:

    1. Xiang Yuan & Luyao Wang & Xicheng Yin & Hongwei Wang, 2021. "How text sentiment moderates the impact of motivational cues on crowdfunding campaigns," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 7(1), pages 1-26, December.
    2. Syed Ali Raza, Muhammad Mansoor, Khalid M. Iraqi, 2019. "Influence of Investor Sentiments on Stock Market Capitalization of Different Economic Sectors in a Developing Economy: Evidence from Pakistan," Journal of Finance and Economics Research, Geist Science, Iqra University, Faculty of Business Administration, vol. 4(1), pages 31-43, March.
    3. Kuo-Hao Lee & Ahmed Elkassabgi & Wei-Jen Hsieh, 2014. "Volatility of the Utilities Industry: Its Causal Relationship to Other Nine Industries," Review of Economics & Finance, Better Advances Press, Canada, vol. 4, pages 15-22, May.
    4. He, Ling T. & Casey, K.M., 2015. "Forecasting ability of the investor sentiment endurance index: The case of oil service stock returns and crude oil prices," Energy Economics, Elsevier, vol. 47(C), pages 121-128.
    5. Zeitun, Rami & Rehman, Mobeen Ur & Ahmad, Nasir & Vo, Xuan Vinh, 2023. "The impact of Twitter-based sentiment on US sectoral returns," The North American Journal of Economics and Finance, Elsevier, vol. 64(C).
    6. Emilios C. C Galariotis & Phil Holmes & Vasileios Kallinterakis & Xiaodong S. Ma, 2014. "Market states, expectations, sentiment and momentum: How naive are investors?," Post-Print hal-00943345, HAL.
    7. Berna Aydogan, 2017. "Sentiment dynamics and volatility of international stock markets," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 7(3), pages 407-419, December.
    8. Stefan Abrantes Costa & Pedro Manuel Nogueira Reis & Antonio Pedro Soares Pinto, 2020. "Subjective/ Behavioural Factors Influence the PSI 20 and IBEX 35," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 11(5), pages 13-27, October.
    9. Syed Aliya Zahera & Rohit Bansal, 2018. "Do investors exhibit behavioral biases in investment decision making? A systematic review," Qualitative Research in Financial Markets, Emerald Group Publishing Limited, vol. 10(2), pages 210-251, May.
    10. He, Zhifang, 2022. "Asymmetric impacts of individual investor sentiment on the time-varying risk-return relation in stock market," International Review of Economics & Finance, Elsevier, vol. 78(C), pages 177-194.
    11. Tiwari, Aviral Kumar & Abakah, Emmanuel Joel Aikins & Bonsu, Christiana Osei & Karikari, Nana Kwasi & Hammoudeh, Shawkat, 2022. "The effects of public sentiments and feelings on stock market behavior: Evidence from Australia," Journal of Economic Behavior & Organization, Elsevier, vol. 193(C), pages 443-472.
    12. Alturki, Sultan & Olson, Eric, 2022. "Oil sentiment and the U.S. inflation premium," Energy Economics, Elsevier, vol. 114(C).

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