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Market response to investor sentiment

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  • Hengelbrock, Jördis
  • Theissen, Erik
  • Westheide, Christian

Abstract

This paper reconsiders the effect of investor sentiment on stock prices. Using survey-based sentiment indicators from Germany and the US we confirm previous findings of predictability at intermediate time horizons. The main contribution of our paper is that we also analyze the immediate price reaction to the publication of sentiment indicators. We find that the sign of the immediate price reaction is the same as that of the predictability at intermediate time horizons. This is consistent with sentiment being related to mispricing but is inconsistent with the alternative explanation that sentiment indicators provide information about future expected returns. --

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Bibliographic Info

Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2011/02.

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Date of creation: 2011
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Handle: RePEc:zbw:cfswop:201102

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Keywords: Investor Sentiment; Event Study; Return Predictability;

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References

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  1. Lee, Charles M C & Shleifer, Andrei & Thaler, Richard H, 1991. " Investor Sentiment and the Closed-End Fund Puzzle," Journal of Finance, American Finance Association, American Finance Association, vol. 46(1), pages 75-109, March.
  2. De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990. "Noise Trader Risk in Financial Markets," Scholarly Articles 3725552, Harvard University Department of Economics.
  3. Neal, Robert & Wheatley, Simon M., 1998. "Do Measures of Investor Sentiment Predict Returns?," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 33(04), pages 523-547, December.
  4. Dennis, Patrick & Mayhew, Stewart, 2002. "Risk-Neutral Skewness: Evidence from Stock Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 37(03), pages 471-493, September.
  5. Stephen J. Brown & William N. Goetzmann & Takato Hiraki & Noriyoshi Shirishi & Masahiro Watanabe, 2003. "Investor Sentiment in Japanese and U.S. Daily Mutual Fund Flows," NBER Working Papers 9470, National Bureau of Economic Research, Inc.
  6. Rahul Verma & Hasan Baklaci & Gokce Soydemir, 2008. "The impact of rational and irrational sentiments of individual and institutional investors on DJIA and S&P500 index returns," Applied Financial Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 18(16), pages 1303-1317.
  7. Elton, Edwin J & Gruber, Martin J & Busse, Jeffrey A, 1998. "Do Investors Care about Sentiment?," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 71(4), pages 477-500, October.
  8. Brown, Gregory W. & Cliff, Michael T., 2004. "Investor sentiment and the near-term stock market," Journal of Empirical Finance, Elsevier, Elsevier, vol. 11(1), pages 1-27, January.
  9. Robert F. Stambaugh, 1999. "Predictive Regressions," NBER Technical Working Papers 0240, National Bureau of Economic Research, Inc.
  10. Schmeling, Maik, 2006. "Institutional and Individual Sentiment: Smart Money and Noise Trader Risk," Hannover Economic Papers (HEP), Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät dp-337, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  11. Gregory W. Brown & Michael T. Cliff, 2005. "Investor Sentiment and Asset Valuation," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 78(2), pages 405-440, March.
  12. Malcolm Baker & Jeffrey Wurgler, 2004. "Investor Sentiment and the Cross-Section of Stock Returns," NBER Working Papers 10449, National Bureau of Economic Research, Inc.
  13. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(5), pages 829-53, October.
  14. Alok Kumar & Charles M.C. Lee, 2006. "Retail Investor Sentiment and Return Comovements," Journal of Finance, American Finance Association, American Finance Association, vol. 61(5), pages 2451-2486, October.
  15. Maria W. Otoo, 1999. "Consumer sentiment and the stock market," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1999-60, Board of Governors of the Federal Reserve System (U.S.).
  16. Edwin J. Elton & Martin J. Gruber & Jeffrey A. Busse, 1998. "Do Investors Care About Sentiment?," New York University, Leonard N. Stern School Finance Department Working Paper Seires, New York University, Leonard N. Stern School of Business- 98-028, New York University, Leonard N. Stern School of Business-.
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Cited by:
  1. Finter, Philipp & Niessen-Ruenzi, Alexandra & Ruenzi, Stefan, 2010. "The impact of investor sentiment on the German stock market," CFR Working Papers 10-03, University of Cologne, Centre for Financial Research (CFR).
  2. Thomas Lux, 2011. "Sentiment dynamics and stock returns: the case of the German stock market," Empirical Economics, Springer, Springer, vol. 41(3), pages 663-679, December.

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