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Individual Investor Sentiment and Stock Returns - What Do We Learn from Warrant Traders?

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Author Info
Schmitz, Philipp () (Lehrstuhl für ABWL, Finanzwirtschaft, insb. Bankbetriebslehre)
Glaser, Markus () (Sonderforschungsbereich 504)
Weber, Martin () (Lehrstuhl für ABWL, Finanzwirtschaft, insb. Bankbetriebslehre)
Abstract

In this paper, we propose a measure of individual investor sentiment that is derived from the market for bank-issued warrants. Due to a unique warrant transaction data set from a large discount broker we are able to calculate a daily sentiment measure and test whether individual investor sentiment is related to daily stock returns by using vector autoregressive models and Granger causality tests. We find that there exists a mutual influence of sentiment and stock market returns, but only in the very short-run (one and two trading days). Returns have a negative influence on sentiment, while the influence of sentiment on returns is positive for the next trading day. The influence of stock market returns on sentiment is stronger than vice versa. Our sentiment measure simultaneously avoids problems that are associated with existing sentiment measures, which are based on the closed-end fund discount, stock market transactions, the put-call ratio or investor surveys.

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Paper provided by Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number 06-12.

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Length: 47 pages
Date of creation: 05 Oct 2006
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Handle: RePEc:xrs:sfbmaa:06-12

Note: We would like to thank Anders Anderson, Christian Klein, Alexander Klos, Michael Meffert, seminar participants at the
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