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An Empirical Study of the Effect of Investor Sentiment on Returns of Different Industries

Author

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  • Chuangxia Huang
  • Xin Yang
  • Xiaoguang Yang
  • Hu Sheng

Abstract

Studies on investor sentiment are mostly focused on the stock market, but little attention has been paid to the effect of investor sentiment on the return of a specific industry. This paper constructs a proxy variable to examine the relationship between investor sentiment and the return of a specific industry, using the Principle Component Analysis, and finds that investor sentiment is positively correlated with the industry return of the current period and negatively correlated with that of one lag period; we classify investor sentiment as optimistic state and pessimistic state and find that optimistic investor sentiment has a positive effect on stock returns of most industries, while pessimistic investor sentiment has no effect on them; this paper further builds a two-state Markov regime switching model and finds that sentiment has different effect on different industries returns on different states of market.

Suggested Citation

  • Chuangxia Huang & Xin Yang & Xiaoguang Yang & Hu Sheng, 2014. "An Empirical Study of the Effect of Investor Sentiment on Returns of Different Industries," Mathematical Problems in Engineering, Hindawi, vol. 2014, pages 1-11, April.
  • Handle: RePEc:hin:jnlmpe:545723
    DOI: 10.1155/2014/545723
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    Cited by:

    1. Li, Yuze & Jiang, Shangrong & Li, Xuerong & Wang, Shouyang, 2021. "The role of news sentiment in oil futures returns and volatility forecasting: Data-decomposition based deep learning approach," Energy Economics, Elsevier, vol. 95(C).
    2. 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).
    3. Muhammad MOHSIN & Sobia NASEEM & Larisa IVAȘCU & Lucian-Ionel CIOCA & Muddassar SARFRAZ & Nicolae Cristian STĂNICĂ, 2021. "Gauging the Effect of Investor Sentiment on Cryptocurrency Market: An Analysis of Bitcoin Currency," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 87-102, December.

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