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The impact of investor sentiment on the German stock market

Listed author(s):
  • Finter, Philipp
  • Niessen-Ruenzi, Alexandra
  • Ruenzi, Stefan

This paper investigates whether investor sentiment can explain stock returns on the German stock market. Based on a principal component analysis, we construct a sentiment indicator that condenses information of several well-known sentiment proxies. We show that this indicator explains the return spread between sentiment stocks and stocks that are not sensitive to sentiment fluctuations. Specifically, stocks that are difficult to arbitrage and hard to value are sensitive to the indicator. However, we do not find much predictive power of sentiment for future stock returns. This is consistent with sentiment being of minor importance on the German stock market that is characterized by a low fraction of retail investors.

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Paper provided by University of Cologne, Centre for Financial Research (CFR) in its series CFR Working Papers with number 10-03.

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Date of creation: 2010
Handle: RePEc:zbw:cfrwps:1003
Contact details of provider: Postal:
0221 / 470 5607

Phone: 0221 / 470 5607
Fax: 0221 / 470 5179
Web page: http://cfr-cologne.de/english/version06/html/home.php
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