The Impact of Investor Sentiment on Stock Returns in Emerging Markets: The Case of Central European Markets

Abstract

This paper studies the effect of investor sentiment on stock returns in three Central European markets: the Czech Republic, Hungary and Poland. The results show that sentiment is a key variable in the prices of stocks traded on these markets and its impact is stronger here than in more developed European markets. This effect is linked to stock characteristics, particularly those considered to make stocks more prone to the influences of investor sentiment. The evidence shows that the effect is not uniform across countries, since higher levels are found for Poland and the Czech Republic, thus confirming the role of country-specific factors in the impact of investor sentiment on stock prices. The results also confirm that sentiment is a twofold (global and local) phenomenon, in which the global dimension has much greater impact than the local dimension, at least in the markets considered. Finally, the paper has shown that sentiment does not spread, at least to any significant degree, through the movement of capital between markets. This strengthens the argument that sentiment is transmitted through a behavioral mechanism. If this argument proves correct, there is little likelihood of local regulatory action being very effective in limiting the perverse impact of asset bubbles.

Investor response to public news, sentiment and institutional trading in emerging markets: A review

“…However, their results also show that the effect is not uniform across countries, because higher levels are found for Poland and the Czech Republic. Corredor et al (2015) confirm the role of country-specific factors in the impact of investor sentiment on stock prices.…”

“…Corredor et al (2015) examine the effect of investor sentiment on stock returns in the Czech Republic, Hungary and Poland. According to their results, sentiment is a key variable driving the prices of stocks traded on these markets and its impact is stronger there than in more developed European markets.…”

Heuristics Bias and Investment Performance: Does Age Matter? Evidence from Colombo Stock Exchange

“…In reality, the investors do not make strictly rational decisions, because they are influenced by emotional and mental factors, even during the information collection and evaluation process. During the last two decades, an increasing number of studies used a heuristics approach in explaining stock price movements in financial markets in both developed and emerging stock exchanges (Kaplanski and Levy, 2010) [16] However, Lim and Brooks [17] find that emerging markets are less efficient and in general experience more frequent price deviations. Earlier research on irrationality in emerging markets presented evidence that investors in China exhibit heuristics biases and make poor investment decisions leading to losses.…”

The pricing of sentiment risk in European stock markets

“…The results of Bai (2014) indicate that regional sentiment has a greater influence on European stock markets compared to the local one and that US sentiment is less important for euro-zone countries. Corredor et al (2015) find evidence that sentiment effect is more pronounced in the emerging EU markets. A conditional model with time-variation in the risk premia can be found by Møller et al (2014) but they consider a European CAPM where sentiment is applied as conditioning information while our focus is on an APT model with sentiment as an additional risk factor besides the classic macroeconomic factors.…”