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The impact of rational and irrational sentiments of individual and institutional investors on DJIA and S&P500 index returns

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  • Rahul Verma
  • Hasan Baklaci
  • Gokce Soydemir

Abstract

We examine the relative effects of rational and irrational investor sentiments on Dow Jones Industrial Average and S&P500 returns. The impact of rational sentiments on stock market returns is found to be greater than that of irrational sentiments. There are immediate positive responses of stock market returns to irrational sentiments corrected by negative responses in the upcoming periods. There are positive effects of past stock market returns on irrational sentiments but not on rational sentiments. The results support the economic fundamentals-based arguments of stock returns. Evidence in favour of irrational sentiments is consistent with the view that investor error is a significant determinant of stock returns.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

Volume (Year): 18 (2008)
Issue (Month): 16 ()
Pages: 1303-1317

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Handle: RePEc:taf:apfiec:v:18:y:2008:i:16:p:1303-1317

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Cited by:
  1. 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.
  2. Hengelbrock, Jördis & Theissen, Erik & Westheide, Christian, 2011. "Market response to investor sentiment," CFS Working Paper Series 2011/02, Center for Financial Studies (CFS).
  3. Yamamoto, Ryuichi & Hirata, Hideaki, 2013. "Strategy switching in the Japanese stock market," Journal of Economic Dynamics and Control, Elsevier, vol. 37(10), pages 2010-2022.
  4. Thomas Lux, 2008. "Sentiment Dynamics and Stock Returns: The Case of the German Stock Market," Kiel Working Papers 1470, Kiel Institute for the World Economy.

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