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Investor mood and financial markets

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  • Shu, Hui-Chu

Abstract

Numerous studies in recent decades have linked investor mood and financial market behavior, but most works have been empirical investigations. This paper bridges the gap between empirical findings and financial theory. By slightly modifying the Lucas (Lucas, R.E., 1978. Asset prices in an exchange economy. Econometrica 46, 1429-1445.) model, this study shows how investor mood variations affect equilibrium asset prices and expected returns. Analysis results indicate that both equity and bill prices correlate positively with investor mood, with higher asset prices associated with better mood. Conversely, expected asset returns correlate negatively with investor mood. Further, the mood effect on asset prices increases when investors are in a good mood, and mood variations exhibit a greater influence on equity markets than on bill markets. Results of this study suggest that investor mood is a vital factor in equilibrium asset prices and returns, and integrating investor mood into asset-pricing models helps to interpret the growing body of seemingly anomalous evidence regarding investor behavior.

Suggested Citation

  • Shu, Hui-Chu, 2010. "Investor mood and financial markets," Journal of Economic Behavior & Organization, Elsevier, vol. 76(2), pages 267-282, November.
  • Handle: RePEc:eee:jeborg:v:76:y:2010:i:2:p:267-282
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    Cited by:

    1. Irresberger, Felix & Mühlnickel, Janina & Weiß, Gregor N.F., 2015. "Explaining bank stock performance with crisis sentiment," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 311-329.
    2. repec:bla:jrinsu:v:84:y:2017:i:4:p:1295-1330 is not listed on IDEAS
    3. Gavriilidis, Konstantinos & Kallinterakis, Vasileios & Tsalavoutas, Ioannis, 2016. "Investor mood, herding and the Ramadan effect," Journal of Economic Behavior & Organization, Elsevier, vol. 132(S), pages 23-38.
    4. Theresa Treffers & Philipp D. Koellinger & Arnold Picot, 2016. "Do Affective States Influence Risk Preferences?," Schmalenbach Business Review, Springer;Schmalenbach-Gesellschaft, vol. 17(3), pages 309-335, December.
    5. Treffers, T. & Koellinger, Ph.D. & Picot, A.O., 2012. "In the Mood for Risk? A Random-Assignment Experiment Addressing the Effects of Moods on Risk Preferences," ERIM Report Series Research in Management ERS-2012-014-ORG, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    6. Stelios Bekiros, 2014. "Detecting nonlinear dependencies in foreign exchange markets: A multistep filtering approach," Working Papers 2014-182, Department of Research, Ipag Business School.

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