Investor sentiment, optimism and excess stock market returns. Evidence from emerging markets

Daszyńska-Żygadło, Karolina; Szpulak, Aleksandra; Szyszka, Adam

doi:10.15208/beh.2014.27

Cited by 20 publications

(10 citation statements)

References 16 publications

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“…Experiment 1 observed this domain-based bias in a positive judgment context, wherein participants were asked to predict the probability that a risky stock was the “good” option relative to a safe bond. This result is consistent with biases observed in investor behavior (Todorov and Bollerslev, 2010; Bollerslev and Todorov, 2011; Daszyńska-Żygadło et al, 2014; Guiso et al, 2018), consumer spending habits (Millet et al, 2012), and private investing (Kuhnen and Miu, 2017). A key contribution of our study is that we extend these findings to negative judgment contexts, in which decision makers assess risky options based on their negative attributes.…”

Section: Discussionsupporting

confidence: 87%

“…This difference in learning traces to the framing effect , where all numerical information is identical, but the description of the task presents or frames the information as either gaining or losing something of value and leads to differential error and risk sensitivity (Kahneman and Tversky, 1979; De Martino et al, 2006; Barberis, 2013; Kuhnen, 2015). For example, investor behavior after negative shocks to the stock market shows evidence of increased risk aversion and pessimism about future stock values (Todorov and Bollerslev, 2010; Bollerslev and Todorov, 2011; Guiso et al, 2018), while stock market returns are associated with greater investor optimism (Daszyńska-Żygadło et al, 2014; Lespagnol and Rouchier, 2018). Thus, losing markets appear to result in more pessimistic future beliefs about risky asset outcomes, while gaining markets result in more optimistic beliefs.…”

Section: Introductionmentioning

confidence: 99%

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Reward Responsiveness and Inhibition Traits Differentially Predict Economic Biases in Gain and Loss Contexts

Fernandez

Lighthall

2019

Front. Psychol.

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Research on economic decision making has revealed specific biases in gain versus loss domains such that risky choice options are overvalued in gain conditions, implying optimism, but undervalued in loss conditions, implying pessimism. Individual differences in motivational traits and affective states have been shown to predict beliefs and behavior in risky decision making, but it is presently unclear which personal characteristics are most predictive of domain-specific biases. To address this gap in the literature, we investigated the relative influence of positive and negative motivational traits (general sensitivity to rewards and punishments) versus affective states (current levels of positive and negative emotions) on beliefs and choice behavior during a risky economic decision task. We also expanded on previous research by examining how the valence of one’s judgment context (positive context tested in Experiment 1, negative context tested in Experiment 2) may determine whether risky choice behavior is more strongly influenced by positive versus negative characteristics. Biases in belief were calculated using an economic decision task that involved estimating the value of risky “stocks” relative to safe “bonds” from experienced outcomes. Experiment 1 used a positive judgment context (likelihood of a “good stock”) while Experiment 2 used a negative judgment context (likelihood of a “bad stock”). Consistent with previous findings, we observed a domain-based bias in beliefs about stock values across experiments, such that participants exhibited optimism in gain domain and pessimism in the loss domain. Experiment 1 further revealed that domain-based bias and suboptimal choice behavior was predicted by trait-level reward sensitivity, while positive affective state (PAS) had a more limited influence on belief bias alone. Under the negative judgment context of Experiment 2, there was a similar relationship between reward sensitivity and choice behavior; however, results revealed a slightly stronger influence of negative affective state (NAS). A subsequent cross-study analysis found sensitivity to rewards was most predictive of domain-based biases. These results suggest that motivational traits – particularly those relating to reward sensitivity – are more consistent predictors of domain-based biases and risky choice behavior than affective states, but their predictive power depends the valence of the decision context.

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Section: Discussionsupporting

confidence: 87%

Section: Introductionmentioning

confidence: 99%

Reward Responsiveness and Inhibition Traits Differentially Predict Economic Biases in Gain and Loss Contexts

Fernandez

Lighthall

2019

Front. Psychol.

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“…Generally, the sentiment feeling is associated with investors' cognitive comparisons in their investment as well as their experience in making an investment decision (Zweig, 1973). Moreover, the proxies of investor sentiments include discount rate, the closed-end fund discount rate, IPO quantity, priceearnings ratio, turnover rate, and consumer confidence index which are used to measure investor sentiment changes (Dasgupta & Singh 2018;Daszyńska-Żygadło, Szpulak & Szyszka, 2014;Naik & Padhi, 2016;Ahmad & Matahir, 2016;Chowdhury & Gizelis, 2016). Investor sentiment is a critical variable in the prices of stocks and has a more substantial impact on the stock returns (Baker, & Wurgler, 2006;Dasgupta, & Singh, 2018).…”

Section: Introductionmentioning

confidence: 99%

Investor Sentiment and Stock Market Return of Non-Financial Firms Listed on the Nairobi Securities Exchange

Nabosu

M’ithiria

2022

JOFA

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Investor sentiment is associated with attitude, thought, feeling, mood, belief, judgment, or expectation of market performance. The sentiment feeling is associated with investors' cognitive comparisons in their investment as well as their experience in making an investment decision. This study examined the effect of investor sentiment on stock market return of non-financial firms listed on the Nairobi Securities Exchange. The study adopted positivism as data collection and hypothesis development and testing was achieved. The study used quantitative research design to correlate study variables using mathematical analysis methods. The correlation results indicated that investor sentiment portrayed a positive association to stock market return. Regression of coefficients of the static model results indicate that investor sentiment and stock market return of non-financial firms listed on the Nairobi securities exchange is positively and significantly related. The results implied that there exist a positive and significant relationship between investor sentiment on stock market return since their coefficient values were positive. The regression coefficients result of lagged stock market return and stock market return was positively and significantly related. The regression of coefficients results indicate that investor sentiment and stock market return is positively and significantly related. The study concluded that investor sentiment has a positive and significant effect on stock market return in non-financial firms. These results imply that when investors are more optimistic about the market generating excess returns, their extreme optimism leads to more speculative activities that tempt them to invest even more. The study also shows that sentiment is relatively correlated with stock returns significantly over time. The study recommends that by taking the investor sentiment into account as a significant determinant of stock market volatility in asset price models, investors can enhance their stock returns. The results can inform on policymakers’ efforts to stabilize stock market volatility and uncertainty in order to protect investors’ wealth and attract more investors. Keywords: Investor Sentiment, Stock Market Return & Non-Financial Firms

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“…Only a couple of articles study how Mexican investor sentiment influences Mexican stock market returns (Perez-Liston and Huerta, 2012; Daszyńska-Żygadło et al , 2014; Perez-Liston et al , forthcoming). Naturally, these studies have their limitations.…”

Section: Introductionmentioning

confidence: 99%

Does investor sentiment predict Mexican equity returns?

Liston-Perez

Torres-Palacio

Bayram

2018

IJMF

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Purpose The purpose of this paper is to test whether investor sentiment is a significant predictor of future Mexican stock market returns. It also estimates the dynamic correlation between investor sentiment and equity returns. Finally, it examines if investor sentiment innovations impact unexpected returns for a variety of portfolios. Design/methodology/approach This study utilizes predictive regressions to determine if sentiment can predict Mexican equity returns. Multivariate GARCH models are estimated to examine the time-varying correlations between investor sentiment and equity returns. Findings The results show that Mexican investor sentiment is a significant predictor of Mexican equity returns for up to 24 months ahead. The findings show that high levels of sentiment today are associated with lower equity returns over the near term. Furthermore, multivariate GARCH estimations indicate that the correlation between investor sentiment and equity returns is not static and varies considerably over time. Finally, the findings indicate that sentiment innovations are significantly correlated with unexpected returns, reinforcing the notion that unexplained sentiment fluctuations lead to unexplained changes in stock market returns. Overall, these results suggest that investor sentiment is a significant source of risk for the Mexican stock market. Originality/value This study seeks to further our understanding of how behavioral factors influence and predict Mexican equity returns.

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Investor sentiment, optimism and excess stock market returns. Evidence from emerging markets

Cited by 20 publications

References 16 publications

Reward Responsiveness and Inhibition Traits Differentially Predict Economic Biases in Gain and Loss Contexts

Reward Responsiveness and Inhibition Traits Differentially Predict Economic Biases in Gain and Loss Contexts

Investor Sentiment and Stock Market Return of Non-Financial Firms Listed on the Nairobi Securities Exchange

Does investor sentiment predict Mexican equity returns?

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