Market sentiment: a key factor of investors’ imitative behaviour

Abstract

The aim of this paper is to explore herding behaviour among investors to determine its rational and emotional component factors and identify relationships among them. We apply causality tests to evaluate the impact of return and market sentiment on herding intensity. The herding intensity is quantified using the measure developed by Patterson and Sharma (2006). The research was conducted during the period 1997-2003 in the Spanish stock market, where the presence of herding has been confirmed. The results reveal that the herding intensity depends on past returns and sentiment or subjective assessments and confirm the presence of both a rational and an emotional factor.

Investor sentiment and feedback trading: Evidence from the exchange-traded fund markets

“…The general finding from this literature is that sentimentrelated overpricing is at least a partial explanation for these asset-pricing anomalies. This is somewhat surprising given that sentiment has been strongly linked with herding activity (Blasco et al, 2011), speculative trading (Lemmon and Ni, 2010), and the profitability of momentum strategy (Antoniou et al, 2010), and that the momentum trading is often referred to as positive feedback trading in the literature. Furthermore, it is well known that many market watchers and finance practitioners believe in "sentiment" and treat it as an indicator for future market movement.…”

Investor mood, herding and the Ramadan effect

“…In relation to the role of sentiment in herding, Liao et al, (2011) find that US institutional investors tend to herd out of stocks that have previously exhibited over-optimistic sentiment, while Blasco et al, (2012) document the significant role of sentiment as an explanatory factor of herding using highfrequency data for the Spanish market.…”

“…First, it tends to render people less risk-averse, leading them to choose investment options they would otherwise decline (Wright & Bower, 1992;Nofsinger, 2002 (Hirshleifer & Teoh, 2003) and other research (Blasco et al, 2012) on the role of optimism in engineering herding in stock markets. Moreover, the common exposure of investors to this emotional state constitutes a factor inducing relative homogeneity of an emotional background in the market, suggesting that this herding is of spurious nature, in line with our earlier discussion on herding typology.…”

Market states, expectations, sentiment and momentum: How naive are investors?

“…The second approach does not provide us with a direct measure of E(MPt,t-i), but rather seeks to measure changes in market sentiment at different points in time, since investors seem to believe in sentiment (Brown and Cliff, 2004) and sentiment is relevant to a range of other issues in financial markets (for example: asset pricing (Baker and Wurgler, 2006); the value effect (Frazzini and Lamont, 2008); feedback trading (Chau et al, 2011); herding (Blasco et al, 2012;and Philippas et al, 2013); stock returns (Spyrou, 2012); volatility (Sayim et al, 2013); and bond yields (Nayak, 2010)). Specifically, we utilise a range of data from the OECD and the European Commission's Directorate General for Economic and Financial Affairs (DGEFA) resulting from business and consumer surveys which are 8 In a recent paper Antoniou et al (2013) examine the role of sentiment on momentum profits in the US market, based on arguments relating to cognitive dissonance and information diffusion.…”