The impact of rational and irrational sentiments of individual and institutional investors on DJIA and S&amp;P500 index returns

Verma, Rahul; Baklaci, Hasan F.; Soydemir, Gökçe

doi:10.1080/09603100701704272

Cited by 58 publications

(70 citation statements)

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“…What is also surprising is that sentiment is exogenous at least up to lag four while in many related studies in the literature strong causation from returns on sentiment is found. Note also that our trading experiments show that the sentiment data can not be interpreted as an inow of information on Sunday evening whose release is incorporated into prices as soon as trading starts 13 See Mizon (1995) for the general methodology and Hoover and Perez (1999) for Monte Carlo evidence on successful specication search under this approach. again on Monday morning.…”

Section: Resultsmentioning

confidence: 97%

“…While we recover predictability and protability only for constrained VAR models estimated via least squares, this is the theoretically preferred structure of our VAR estimation given the many insignicant parameters and the results of specication tests. Our most successful specication -the restricted VAR(5) estimated via least squares-could be seen as the adaptation of a straightforward general-to-specic approach to our setting 13 . However, although the success of our VAR models in the forecasting and trading exercises depends crucially on an appropriate specication, the results on causality are extremely robust.…”

Section: Resultsmentioning

confidence: 99%

“…A trading experiment using sentiment as a signal shows no abnormal performance. Verma et al (2008), in contrast, nd some predictive power after decomposing both individual and institutional sentiment into rational and irrational components. Rational components are identied by a regression of the raw sentiment data on a set of fundamental factors while the residuals of this regression are interpreted as the irrational part.…”

Section: Introductionmentioning

confidence: 97%

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Sentiment dynamics and stock returns: the case of the German stock market

Lux

2010

Empir Econ

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Abstract:We use weekly survey data on short-term and medium-term sentiment of German investors in order to study the causal relationship between investors' mood and subsequent stock price changes. In contrast to extant literature for other countries, a tri-variate vector autoregression for short-run sentiment, medium-run sentiment and stock index returns allows to reject exogeneity of returns. Depending on the chosen VAR specification, returns are found to either follow a feedback process caused by medium-run sentiment, or returns form a simultaneous systems together with the two sentiment measures. An out-of-sample forecasting experiment on the base of estimated VAR models shows significant exploitable linear structure for the richer VAR(5) model. Out-of-sample trading experiments underscore the potential for excess profits from a VAR-based strategy compared to the buy-and-hold benchmark.Keywords: investor sentiment, opinion dynamics, return predictability JEL classification: G12, G14, C22 Abstract: We use weekly survey data on short-term and medium-term sentiment of German investors in order to study the causal relationship between investors' mood and subsequent stock price changes. In contrast to extant literature for other countries, a tri-variate vector autoregression for short-run sentiment, medium-run sentiment and stock index returns allows to reject exogeneity of returns. Depending on the chosen VAR specication, returns are found to either follow a feedback process caused by medium-run sentiment, or returns form a simultaneous systems together with the two sentiment measures. An out-of-sample forecasting experiment on the base of estimated VAR models shows signicant exploitable linear structure for the richer VAR(5) model. Out-of-sample trading experiments underscore the potential for excess prots from a VAR-based strategy compared to the buy-and-hold benchmark. Thomas LuxJEL classication: G12, G14, C22 Keywords: investor sentiment, opinion dynamics, return predictability * Contact adress: Thomas Lux, Department of Economics, University of Kiel, Olshausen Str. 40, 24118 Kiel, Germany, E-Mail: lux@bwl.uni-kiel.de † The author is grateful for helpful comments to Jonas Dovern, Carsten-Patrick Meier, Adriano Rampini and participants at the sta seminar at the Kiel Institute. I also thank Thomas Theuerzeit of animusX for providing the sentiment data and oering useful insights into the structure of the survey.

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Section: Resultsmentioning

confidence: 97%

Section: Resultsmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 97%

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Sentiment dynamics and stock returns: the case of the German stock market

Lux

2010

Empir Econ

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“…In addition, they only investigate the effect of investor sentiment on stock returns. The effect of foreign investor sentiments in emerging stock market returns and volatility is not fully examined (Verma, Baklaci, & Soydemir, 2008;Verma & Soydemir, 2006). Therefore, this study examines the impact of the U.S. institutional investor sentiment on the ISE returns and volatility.…”

Section: Literature Reviewmentioning

confidence: 99%

An examination of U.S. institutional and individual investor sentiment effect on the Turkish stock market

Sayim

Rahman

2015

Global Finance Journal

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“…When selecting sentiment proxies, there are mainly two ways. Foreign scholars usually uses direct way to express personal and institutional investor sentiment [7]. By contrast, domestic scholars both use direct and indirect ways [8,9].…”

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confidence: 99%

The Impact of Personal and Institutional Investor Sentiment on Stock Returns under the Chinese Stock Market Crash

Wang¹

2017

Proceedings of the 2017 International Conference on Economics, Finance and Statistics (ICEFS 2017)

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Abstract. Under Chinese stock market crash, personal and institutional investor sentiment is out of control, which leads to the stock prices fall further. Therefore this article uses the concept of behavioural finance to study the problem. This essay uses multiple regressions to study the influence of the current and lagged emotions of individuals and institutions on the stock returns. The conclusion is helpful to solve the stock market crash and improve the economy in China.Keywords: stock market crash, individual investor sentiment, institutional investor sentiment, multi-factors pricing model IntroductionThe stock market crash happened in 2015 made the investors suffer a lot. Stock prices decreased sharply and thousands of stocks fell in lock step. Individual and institutional investor sentiment was out of control, and they sold the shares, which leaded to the stock prices fall further. However, the measures taken by government had no effect. Thus, focusing on stock market crash occurred in 2008, this essay studies the impact of personal and institutional investor sentiment on stock yields. Foreign scholars began to explore this area in the 1990s, and mainly focused on the existence of internal mechanism between investor sentiment and stock yields. They created different theoretical models to explain the internal mechanism, including DSSW model (2011) paid close attention to the Bull and Bear, and found that at the bear market, investor sentiment affected stock returns more deeply than that at bull market [6]. When selecting sentiment proxies, there are mainly two ways. Foreign scholars usually uses direct way to express personal and institutional investor sentiment [7]. By contrast, domestic scholars both use direct and indirect ways [8,9].

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The impact of rational and irrational sentiments of individual and institutional investors on DJIA and S&P500 index returns

Cited by 58 publications

References 54 publications

Sentiment dynamics and stock returns: the case of the German stock market

Sentiment dynamics and stock returns: the case of the German stock market

An examination of U.S. institutional and individual investor sentiment effect on the Turkish stock market

The Impact of Personal and Institutional Investor Sentiment on Stock Returns under the Chinese Stock Market Crash

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