IDEAS home Printed from https://ideas.repec.org/a/jfr/ijfr11/v11y2020i5p13-27.html
   My bibliography  Save this article

Subjective/ Behavioural Factors Influence the PSI 20 and IBEX 35

Author

Listed:
  • Stefan Abrantes Costa
  • Pedro Manuel Nogueira Reis
  • Antonio Pedro Soares Pinto

Abstract

This study assesses the impact of investor sentiment on the volatility of the PSI 20 and IBEX 35 from time series data from January 1988 to May 2019. The impact of investor sentiment on market and portfolio selection has aroused great interest in the literature, however the results obtained are not consensual, considering the different methodologies used to build sentiment indices, as well as the various levels of institutional development in the market. Asymmetric volatility behaviours according to good or bad news were evaluated using the TGARCH model. The results indicate that there is an asymmetric effect of good versus bad news on the volatility of IBEX 35. It was also noted that for Portugal and Spain investor sentiment presents statistical significance with a negative sign, suggesting that market volatility is more sensitive to negative shocks in the conditional variance. In Portugal, contrary to Spain, sentiment has no relevance on return. The study reveals that investor sentiment is a key factor in selecting investment in the market. The relationship that this establishes with volatility, can help to implement policies that allow to minimize future shocks¡¯ impact on return. The study reveals for the first time that investor sentiment is a key factor in selecting investment in the market for Portugal.

Suggested Citation

  • 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.
    • Handle: RePEc:jfr:ijfr11:v:11:y:2020:i:5:p:13-27
    DOI: 10.5430/ijfr.v11n5p13
    as

    Download full text from publisher

    File URL: http://www.sciedu.ca/journal/index.php/ijfr/article/view/18963/11637
    Download Restriction: no
    File URL: http://www.sciedu.ca/journal/index.php/ijfr/article/view/18963
    Download Restriction: no
    File URL: https://libkey.io/10.5430/ijfr.v11n5p13?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Kumari, Jyoti & Mahakud, Jitendra, 2015. "Does investor sentiment predict the asset volatility? Evidence from emerging stock market India," Journal of Behavioral and Experimental Finance, Elsevier, vol. 8(C), pages 25-39.
    2. Jean Yu & Hung-Hsi Huang & Shu-Wei Hsu, 2014. "Investor Sentiment Influence on the Risk-Reward Relation in the Taiwan Stock Market," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 50(2S), pages 174-188, March.
    3. Shangkari V. Anusakumar & Ruhani Ali & Hooy Chee Wooi, 2017. "The Effect of Investor Sentiment on Stock Returns: Insight from Emerging Asian Markets," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 13(1), pages 159-178.
    4. Dergiades, Theologos, 2012. "Do investors’ sentiment dynamics affect stock returns? Evidence from the US economy," Economics Letters, Elsevier, vol. 116(3), pages 404-407.
    5. Bollerslev, Tim & Ole Mikkelsen, Hans, 1996. "Modeling and pricing long memory in stock market volatility," Journal of Econometrics, Elsevier, vol. 73(1), pages 151-184, July.
    6. Gregory W. Brown & Michael T. Cliff, 2005. "Investor Sentiment and Asset Valuation," The Journal of Business, University of Chicago Press, vol. 78(2), pages 405-440, March.
    7. Breusch, T S, 1978. "Testing for Autocorrelation in Dynamic Linear Models," Australian Economic Papers, Wiley Blackwell, vol. 17(31), pages 334-355, December.
    8. Zhi Da & Joseph Engelberg & Pengjie Gao, 2015. "Editor's Choice The Sum of All FEARS Investor Sentiment and Asset Prices," The Review of Financial Studies, Society for Financial Studies, vol. 28(1), pages 1-32.
    9. Schmeling, Maik, 2009. "Investor sentiment and stock returns: Some international evidence," Journal of Empirical Finance, Elsevier, vol. 16(3), pages 394-408, June.
    10. Smidt, Seymour, 1968. "A New Look at the Random Walk Hypothesis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 3(3), pages 235-261, September.
    11. Barberis, Nicholas & Thaler, Richard, 2003. "A survey of behavioral finance," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 18, pages 1053-1128, Elsevier.
    12. D. Schneller & S. Heiden & M. Heiden & A. Hamid, 2018. "Home is Where You Know Your Volatility – Local Investor Sentiment and Stock Market Volatility," German Economic Review, Verein für Socialpolitik, vol. 19(2), pages 209-236, May.
    13. 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.
    14. Lutz, Chandler, 2016. "The Asymmetric Effects Of Investor Sentiment," Macroeconomic Dynamics, Cambridge University Press, vol. 20(6), pages 1477-1503, September.
    15. Verma, Rahul & Soydemir, Gökçe, 2009. "The impact of individual and institutional investor sentiment on the market price of risk," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(3), pages 1129-1145, August.
    16. Wang, Yaw-Huei & Keswani, Aneel & Taylor, Stephen J., 2006. "The relationships between sentiment, returns and volatility," International Journal of Forecasting, Elsevier, vol. 22(1), pages 109-123.
    17. Jean Yu & Hung-Hsi Huang & Shu-Wei Hsu, 2014. "Investor Sentiment Influence on the Risk-Reward Relation in the Taiwan Stock Market," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 50(S2), pages 174-188.
    18. Fama, Eugene F. & Schwert, G. William, 1977. "Asset returns and inflation," Journal of Financial Economics, Elsevier, vol. 5(2), pages 115-146, November.
    19. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-738, August.
    20. Lee, Charles M C & Shleifer, Andrei & Thaler, Richard H, 1991. "Investor Sentiment and the Closed-End Fund Puzzle," Journal of Finance, American Finance Association, vol. 46(1), pages 75-109, March.
    21. P. Corredor & E. Ferrer & R. Santamaria, 2015. "The Impact of Investor Sentiment on Stock Returns in Emerging Markets: The Case of Central European Markets," Eastern European Economics, Taylor & Francis Journals, vol. 53(4), pages 328-355, July.
    22. Spyros Spyrou, 2013. "Investor sentiment and yield spread determinants: evidence from European markets," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 40(6), pages 739-762, October.
    23. Baker, Malcolm & Wurgler, Jeffrey & Yuan, Yu, 2012. "Global, local, and contagious investor sentiment," Journal of Financial Economics, Elsevier, vol. 104(2), pages 272-287.
    24. G.M. Constantinides & M. Harris & R. M. Stulz (ed.), 2003. "Handbook of the Economics of Finance," Handbook of the Economics of Finance, Elsevier, edition 1, volume 1, number 1.
    25. Labidi, Chiraz & Yaakoubi, Soumaya, 2016. "Investor sentiment and aggregate volatility pricing," The Quarterly Review of Economics and Finance, Elsevier, vol. 61(C), pages 53-63.
    26. Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," The Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July.
    27. Mohamed Zouaoui & Geneviève Nouyrigat & Francisca Beer, 2011. "How does investor sentiment affect stock market crises?Evidence from panel data," Working Papers CREGO 1110304, Université de Bourgogne - CREGO EA7317 Centre de recherches en gestion des organisations.
    28. Ritter, Jay R., 2003. "Investment banking and securities issuance," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 5, pages 255-306, Elsevier.
    29. Zakoian, Jean-Michel, 1994. "Threshold heteroskedastic models," Journal of Economic Dynamics and Control, Elsevier, vol. 18(5), pages 931-955, September.
    30. Glosten, Lawrence R & Jagannathan, Ravi & Runkle, David E, 1993. "On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks," Journal of Finance, American Finance Association, vol. 48(5), pages 1779-1801, December.
    31. Godfrey, Leslie G, 1978. "Testing against General Autoregressive and Moving Average Error Models When the Regressors Include Lagged Dependent Variables," Econometrica, Econometric Society, vol. 46(6), pages 1293-1301, November.
    32. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    33. Andy C.W. Chui & Sheridan Titman & K.C. John Wei, 2010. "Individualism and Momentum around the World," Journal of Finance, American Finance Association, vol. 65(1), pages 361-392, February.
    34. Lee, Wayne Y. & Jiang, Christine X. & Indro, Daniel C., 2002. "Stock market volatility, excess returns, and the role of investor sentiment," Journal of Banking & Finance, Elsevier, vol. 26(12), pages 2277-2299.
    35. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    36. Reis, Pedro Manuel Nogueira & Pinho, Carlos, 2020. "A new European investor sentiment index (EURsent) and its return and volatility predictability," Journal of Behavioral and Experimental Finance, Elsevier, vol. 27(C).
    37. L.A. Smales, 2017. "The importance of fear: investor sentiment and stock market returns," Applied Economics, Taylor & Francis Journals, vol. 49(34), pages 3395-3421, July.
    38. Mohamed Zouaoui & G. Nouyrigat & F. Beer, 2011. "How Does Investor Sentiment Affect StockMarket Crises? Evidence from Panel Data," Post-Print halshs-00785809, HAL.
    39. Zweig, Martin E, 1973. "An Investor Expectations Stock Price Predictive Model Using Closed-End Fund Premiums," Journal of Finance, American Finance Association, vol. 28(1), pages 67-78, March.
    40. Frugier, Alain, 2016. "Returns, volatility and investor sentiment: Evidence from European stock markets," Research in International Business and Finance, Elsevier, vol. 38(C), pages 45-55.
    41. Mehwish Aziz Khan & Eatzaz Ahmad, 2018. "Measurement of Investor Sentiment and Its Bi-Directional Contemporaneous and Lead–Lag Relationship with Returns: Evidence from Pakistan," Sustainability, MDPI, vol. 11(1), pages 1-20, December.
    42. Brown, Gregory W. & Cliff, Michael T., 2004. "Investor sentiment and the near-term stock market," Journal of Empirical Finance, Elsevier, vol. 11(1), pages 1-27, January.
    43. Paulo Horta & Júlio Lobão, 2018. "Global and Extreme Dependence Between Investor Sentiment and Stock Returns in European Markets," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 19(2), pages 141-158, April.
    44. Breusch, T S & Pagan, A R, 1979. "A Simple Test for Heteroscedasticity and Random Coefficient Variation," Econometrica, Econometric Society, vol. 47(5), pages 1287-1294, September.
    45. Meir Statman, 2014. "Behavioral finance: Finance with normal people," Borsa Istanbul Review, Research and Business Development Department, Borsa Istanbul, vol. 14(2), pages 65-73, June.
    46. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    47. Benoit Mandelbrot, 2015. "The Variation of Certain Speculative Prices," World Scientific Book Chapters, in: Anastasios G Malliaris & William T Ziemba (ed.), THE WORLD SCIENTIFIC HANDBOOK OF FUTURES MARKETS, chapter 3, pages 39-78, World Scientific Publishing Co. Pte. Ltd..
    48. Mohamed Zouaoui & Geneviève Nouyrigat & Francisca Beer, 2011. "How Does Investor Sentiment Affect Stock Market Crises? Evidence from Panel Data," The Financial Review, Eastern Finance Association, vol. 46(4), pages 723-747, November.
    49. Bhimjee, Diptes C. & Ramos, Sofia B. & Dias, José G., 2016. "Banking industry performance in the wake of the global financial crisis," International Review of Financial Analysis, Elsevier, vol. 48(C), pages 376-387.
    50. Gang He & Shuzhen Zhu & Haifeng Gu, 2017. "On the construction of Chinese stock market investor sentiment index," Cogent Economics & Finance, Taylor & Francis Journals, vol. 5(1), pages 1412230-141, January.
    51. Corredor, Pilar & Ferrer, Elena & Santamaria, Rafael, 2013. "Investor sentiment effect in stock markets: Stock characteristics or country-specific factors?," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 572-591.
    52. Thomas Lux, 2011. "Sentiment dynamics and stock returns: the case of the German stock market," Empirical Economics, Springer, vol. 41(3), pages 663-679, December.
    53. G.M. Constantinides & M. Harris & R. M. Stulz (ed.), 2003. "Handbook of the Economics of Finance," Handbook of the Economics of Finance, Elsevier, edition 1, volume 1, number 2.
    54. Alok Kumar & Charles M.C. Lee, 2006. "Retail Investor Sentiment and Return Comovements," Journal of Finance, American Finance Association, vol. 61(5), pages 2451-2486, October.
    55. Michael Lemmon & Evgenia Portniaguina, 2006. "Consumer Confidence and Asset Prices: Some Empirical Evidence," The Review of Financial Studies, Society for Financial Studies, vol. 19(4), pages 1499-1529.
    56. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Pedro Manuel Nogueira Reis & Carlos Pinho, 2021. "A Reappraisal of the Causal Relationship between Sentiment Proxies and Stock Returns," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 22(4), pages 420-442, October.
    2. 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.
    3. Wang, Wenzhao & Duxbury, Darren, 2021. "Institutional investor sentiment and the mean-variance relationship: Global evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 191(C), pages 415-441.
    4. Seok, Sang Ik & Cho, Hoon & Ryu, Doojin, 2019. "Firm-specific investor sentiment and daily stock returns," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).
    5. Keunbae Ahn, 2021. "Predictable Fluctuations in the Cross-Section and Time-Series of Asset Prices," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2021.
    6. Mariano González-Sánchez & M. Encina Morales de Vega, 2021. "Influence of Bloomberg’s Investor Sentiment Index: Evidence from European Union Financial Sector," Mathematics, MDPI, vol. 9(4), pages 1-21, February.
    7. Deven Bathia & Don Bredin & Dirk Nitzsche, 2016. "International Sentiment Spillovers in Equity Returns," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 21(4), pages 332-359, October.
    8. Mehwish Aziz Khan & Eatzaz Ahmad, 2018. "Measurement of Investor Sentiment and Its Bi-Directional Contemporaneous and Lead–Lag Relationship with Returns: Evidence from Pakistan," Sustainability, MDPI, vol. 11(1), pages 1-20, December.
    9. Kumari, Jyoti, 2019. "Investor sentiment and stock market liquidity: Evidence from an emerging economy," Journal of Behavioral and Experimental Finance, Elsevier, vol. 23(C), pages 166-180.
    10. Daniel Perez-Liston & Daniel Huerta-Sanchez & Juan Gutierrez, 2018. "Do Domestic Sentiment and the Spillover of US Investor Sentiment Impact Mexican Stock Market Returns?," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 17(2_suppl), pages 185-212, August.
    11. Reis, Pedro Manuel Nogueira & Pinho, Carlos, 2020. "A new European investor sentiment index (EURsent) and its return and volatility predictability," Journal of Behavioral and Experimental Finance, Elsevier, vol. 27(C).
    12. Ngoc Bao Vuong & Yoshihisa Suzuki, 2022. "The Moderating Effect of Market-Specific Factors on the Return Predictability of Investor Sentiment," SAGE Open, , vol. 12(3), pages 21582440221, July.
    13. 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.
    14. Xiao Han & Nikolaos Sakkas & Jo Danbolt & Arman Eshraghi, 2022. "Persistence of investor sentiment and market mispricing," The Financial Review, Eastern Finance Association, vol. 57(3), pages 617-640, August.
    15. Wang, Wenzhao & Su, Chen & Duxbury, Darren, 2021. "Investor sentiment and stock returns: Global evidence," Journal of Empirical Finance, Elsevier, vol. 63(C), pages 365-391.
    16. Dragos Stefan Oprea & Laura Brad, 2014. "Investor Sentiment and Stock Returns: Evidence from Romania," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 4(2), pages 19-25, April.
    17. Azilawati Banchit & Sazali Abidin & Sophyafadeth Lim & Fareiny Morni, 2020. "Investor Sentiment, Portfolio Returns, and Macroeconomic Variables," JRFM, MDPI, vol. 13(11), pages 1-14, October.
    18. Deven Bathia & Don Bredin, 2013. "An examination of investor sentiment effect on G7 stock market returns," The European Journal of Finance, Taylor & Francis Journals, vol. 19(9), pages 909-937, October.
    19. Wang, Wenzhao & Su, Chen & Duxbury, Darren, 2022. "The conditional impact of investor sentiment in global stock markets: A two-channel examination," Journal of Banking & Finance, Elsevier, vol. 138(C).
    20. repec:hur:ijaraf:v:4:y:2014:i:2:p:23-29 is not listed on IDEAS
    21. Rilwan Sakariyahu & Mohamed Sherif & Audrey Paterson & Eleni Chatzivgeri, 2021. "Sentiment‐Apt investors and UK sector returns," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 3321-3351, July.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:jfr:ijfr11:v:11:y:2020:i:5:p:13-27. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Gina Perry (email available below). General contact details of provider: http://ijfr.sciedupress.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.