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YOSHINAGA, C. E. The Relationship between Market Sentiment Index and Stock Returns: a Panel Data Analysis. 162p. Thesis (Doctoral)

This article analyzes the relationship between market sentiment and future stock rates of return. We used a methodology based on principal component analysis to create a sentiment index for the Brazilian market with data from 1999 to 2008. The sample consisted of companies listed on BM&FBOVESPA which were grouped into quintiles, each representing a portfolio, according to the magnitude of the following characteristics: market value, total annualized risk and listing time on BM&FBOVESPA. Next, we calculated the average return of each portfolio for every quarter. The data for the first and last quintiles were analyzed via two-factor ANOVA, using sentiment index of the previous period (positive or negative) as the main factor and each characteristic as controlling factors. Finally, the sentiment index was included in a panel data pricing model. The results indicate a significant and negative relationship between the market sentiment index and the future rates of return. These findings suggest the existence of a reversion pattern in stock returns, meaning that after a positive sentiment period, the impact on subsequent stock returns is negative, and vice-versa.

The disposition effect predicts that investors tend to sell winning stocks too soon and ride losing stocks too long. Despite the wide range of research evidence about this issue, the reasons that lead investors to act this way are still subject to much controversy between rational and behavioral explanations. In this article, the main goal was to test two competing behavioral motivations to justify the disposition effect: prospect theory and mean reversion bias. To achieve it, an analysis of monthly transactions for a sample of 51 Brazilian equity funds from 2002 to 2008 was conducted and regression models with qualitative dependent variables were estimated in order to set the probability of a manager to realize a capital gain or loss as a function of the stock return. The results brought evidence that prospect theory seems to guide the decision-making process of the managers, but the hypothesis that the disposition effect is due to mean reversion bias could not be confirmed.KEYWORDS | Loss aversion, disposition effect, prospect theory, mean reversion, logistic regression. RESUMO RAE-Revista de Administração de Empresas | FGV-EAESP

Behavioral Finance in Brazil: applying the prospect theory to potential investors Finanças Comportamentais no Brasil: uma aplicação da teoria da perspectiva em potenciais investidores Finanzas comportamentales en Brasil: aplicación de la teoría de la perspectiva a los inversores potenciales

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Purpose This study aims to investigate the association of demographic characteristics, market conditions and risk taking with the disposition effect using data on Brazilian individual investors. Design/methodology/approach This study uses a unique data set with monthly data from June 2007 to February 2017 provided by one of the largest asset management firms in Brazil. This paper computes the proportion of gains realized and the proportion of losses realized to see if investors incur the disposition effect. This paper then performs logistic regressions to verify the association between investors’ disposition effects and demographic and portfolio characteristics. This paper analyses the prevalence of cognitive biases depending on market conditions (bull or bear markets) and include regressions by asset class as robustness checks. Findings This paper finds evidence that risk averse investors are more prone to the disposition effect, male subjects are less prone to this cognitive bias and age is not associated with the disposition effect. This paper observes that the tendency to incur the disposition effect decreases during bull markets but increases during bear markets. Also, this paper finds that sophisticated investors are more prone to selling winning assets and holding on to losses. Research limitations/implications First, paper gains and losses are based on the highest and lowest prices of the month and not on the price at the moment the sale occurred. Second, this paper had access only to end-of-month information, not to actual daily trading records. Third, because the data set relates to individual investors who trade investment funds, this paper cannot determine whether firm size is associated with the disposition effect. Fourth, age may not necessarily be a proxy for investor experience, so one should interpret the lack of significance for age in terms of generational differences. Practical implications This paper demonstrates that the disposition effect is prevalent even among wealthier and more educated investors with delegated asset classes. This paper also presents evidence on the association between demographic characteristics and cognitive biases considering a liquidity-constrained, highly volatile and developing market. Social implications This paper demonstrates that gender is an important characteristic to understand cognitive biases and that investor sophistication may not necessarily be an attenuation factor for the disposition effect in a liquidity-constrained market. Originality/value This is the first study to analyse the role of demographic characteristics and risk taking to explain the disposition effect using real information at the individual level about Brazilian investors. It is also the first to analyse the intensity of cognitive biases during bull and bear markets in the Brazilian economy.

We have analyzed results of the Brazilian National Student Performance exam, applied by the Ministry of Education, to verify overconfidence in students. Looking at 549,487 student-level observations, we estimated an overconfidence score, comparing the perceived performance with the actual grade in two different parts of the exam. Ordered logit models suggest that overconfidence in Brazilian students is positively correlated with income and that overconfident students took less time to complete the exam. Contrary to previous studies conducted in other countries, male students presented lower overconfidence in our sample. Moreover, performance was inversely related to the overconfidence score, indicating that students with better performance "know more about what they do not know", as already widely discussed in the education literature.