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Predicting the sensitivity of trading intensity to investor sentiments and beliefs: Evidence from the French stock market

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Author Info

  • Stelios Bekiros
  • Abderrazak Dhaoui
  • Naceur Khraief

Abstract

In this study we show that investor sentiment plays a key role in explaining trading intensity and market trend changes. Based on both econometric and fuzzy logic approaches, the empirical findings demonstrate that pessimistic sentiment has a particularly significant impact on the French financial market trend. Moreover, the results suggest that the impact of pessimism on asset returns exceeds that of optimism as a direct indicator of investor’s beliefs. Indirect indicators of agent sentiment present more smoothed effects on these two market components. Our results indicate that incorporating psychological factors in macro-financial models leads to better supervision and control of the main drivers of the markets.

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Bibliographic Info

Paper provided by Department of Research, Ipag Business School in its series Working Papers with number 2014-182.

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Length: 26 pages
Date of creation: 25 Feb 2014
Date of revision:
Handle: RePEc:ipg:wpaper:2014-182

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Keywords: Fuzzy sets; Finance; Investment analysis; Animal spirits;

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  1. Clark, Peter K, 1973. "A Subordinated Stochastic Process Model with Finite Variance for Speculative Prices," Econometrica, Econometric Society, vol. 41(1), pages 135-55, January.
  2. Barberis, Nicholas & Shleifer, Andrei & Vishny, Robert, 1998. "A model of investor sentiment," Journal of Financial Economics, Elsevier, vol. 49(3), pages 307-343, September.
  3. Shu, Hui-Chu, 2010. "Investor mood and financial markets," Journal of Economic Behavior & Organization, Elsevier, vol. 76(2), pages 267-282, November.
  4. Crouch, R L, 1970. "A Nonlinear Test of the Random-Walk Hypothesis," American Economic Review, American Economic Association, vol. 60(1), pages 199-202, March.
  5. Haruvy, Ernan & Stahl, Dale O. & Wilson, Paul W., 1999. "Evidence for optimistic and pessimistic behavior in normal-form games," Economics Letters, Elsevier, vol. 63(3), pages 255-259, June.
  6. Bekiros, Stelios D., 2010. "Fuzzy adaptive decision-making for boundedly rational traders in speculative stock markets," European Journal of Operational Research, Elsevier, vol. 202(1), pages 285-293, April.
  7. Andrew R. Jackson, 2005. "Trade Generation, Reputation, and Sell-Side Analysts," Journal of Finance, American Finance Association, vol. 60(2), pages 673-717, 04.
  8. Kent Daniel & David Hirshleifer & Avanidhar Subrahmanyam, 1998. "Investor Psychology and Security Market Under- and Overreactions," Journal of Finance, American Finance Association, vol. 53(6), pages 1839-1885, December.
  9. Malcolm Baker & Jeffrey Wurgler, 2004. "Investor Sentiment and the Cross-Section of Stock Returns," NBER Working Papers 10449, National Bureau of Economic Research, Inc.
  10. De Bondt, Werner F M & Thaler, Richard H, 1987. " Further Evidence on Investor Overreaction and Stock Market Seasonalit y," Journal of Finance, American Finance Association, vol. 42(3), pages 557-81, July.
  11. Daniel Kahneman, 2003. "A Psychological Perspective on Economics," American Economic Review, American Economic Association, vol. 93(2), pages 162-168, May.
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