Investor sentiment and herding - an empirical study of UK investor sentiment and herding behaviour

The objectives of this thesis are: first, to investigate the impact of investor sentiment in UK financial markets in different investment intervals through the construction of separate sentiment measures for UK investors and UK institutional investors; second, to examine institutional herding behaviour by studying UK mutual fund data; third, to explore the causal relation between institutional herding and investor sentiment. The study uses US, German and UK financial market data and investor sentiment survey data from 1st January 1996 to 30th June 2011. The impact of investor sentiment on UK equity returns is studied both in general, and more specifically by distinguishing between tranquil and financial crisis periods. It is found that UK equity returns are significantly influenced by US individual and institutional sentiment and hardly at all by local UK investor sentiment. The sentiment contagion across borders is more pronounced in the shorter investment interval. The investigation of institutional herding behaviour is conducted by examining return dispersions and the Beta dispersions of UK mutual funds. Little evidence of herding in return is found, however strong evidence of Beta herding is presented. The study also suggests that beta herding is not caused by market fundamental and macroeconomic factors, instead, it perhaps arises from investor sentiment. This is consistent between closed-end and open-ended funds. The relation between institutional herding and investor sentiment is investigated by examining the measures of herding against the measures of investor sentiment in the UK and US. It suggests that UK institutional herding is influenced by investor sentiment, and UK institutional sentiment has a greater impact as compared to UK market sentiment. Open-end fund managers are more likely to be affected by individual investor sentiment, whereas closed-end fund managers herd on institutional sentiment

THE THEORY OF CONTRARY OPINION: A TEST USING SENTIMENT INDICES IN FUTURES MARKETS

The theory of contrary opinion predicts price reversals following extremes in market sentiment. This research tests a survey-based sentiment index's usefulness as a contrary indicator across 28 U.S. futures markets. Using rigorous time-series tests, the sentiment index displays only a sporadic and marginal ability to predict returns, and in those instances the pattern is one of return continuation--not reversals. Therefore, futures traders who rely solely upon sentiment indices as contrary indicators may be misguided.bullish consensus, contrary opinion, market sentiment, Marketing,

PSI-20 fluctuation : correlation of the portuguese stock market with major global capital markets

In this paper, we will analyze the increase of correlations in the market during periods of crisis, due to its paramount importance to the management and optimization of the portfolio, and especially for risk diversification in portfolio management. An evaluation of the level of correlation between the stock markets is important for several reasons. First, it enables to evaluate changes in the patterns of correlation, and thus to make the proper adjustments in portfolios’ investment. Second, policy makers are also interested in these correlations because of its implications for the stability of the financial system. The correlation coefficients are biased measures of dependence when markets become more volatile. This paper explores the correlation of the Portuguese capital markets with the Asian, American, European and Latin American Spanish stock markets. To this end, we used the PSI-20 index, Nikkei 225, NASDAQ, S&P 500, Euronext 100 and Ibex-35. Our analysis results show that the correlation does exist as a phenomenon during financial crises (Bear Market), reducing the benefits of portfolio diversification when most needed. Moreover, we believe that correlations have increased between the markets in recent years.N/

Regional Integration of Equity Markets in Sub-Saharan Africa

Equity markets in developing and emerging economies have grown in number and importance as a result of financial market globalisation. However, their role in economic growth and development is enhanced if nascent markets are integrated with well-established ones. Market integration, measured by the transmission of returns volatility, is identified across a sample of SSA countries, using a unique dataset. Evidence for potential integration between financial markets in Sub-Saharan Africa (SSA) is found. Spillovers are found across markets, some unidirectional and others bi-directional. However, continued illiquidity and incomplete institutions indicate that an integrated financial community remains premature, and considerable regulatory reform and harmonisation will be necessary for this to succeed

Behavior of Equity Risk Premium After a Catastrophic Event

The Study focuses on how the equity risk premium of selected financial institutions behaved after the global financial crisis and the Euro sovereign debt crisis. Equity risk premium is calculated as a result of historical and projected data by using free cash flow to equity formula. By solving the cost of equity and deducting country risk premium the result is a company specific equity risk premium. The risk premiums are then compared with stress test conducted by the European Banking Authority (EBA). The hypothesis is that the higher the equity risk premium the lower should the placement in the stress test be. I also found that the global financial crisis had less of an effect on equity risk premium than the Euro sovereign debt crisis. The hypothesis is rejected by statistical tests. In fact, the results show no correlation between equity risk premium and stress test placement. In efficient markets, investors should reward the more risk averse financial institutions with a lower risk premium. However, this study does not take a stand on the on-going debate of the efficiency of markets. Indeed, the efficient market hypothesis does allow short term predictability and anomalies to occur as a result of irrational investors. But as the mispricing of equity risk premium is persistent some behavioral finance concepts are discussed as possible reasons for the market behavior. The main concepts discussed are herd behavior and belief perseverance. As the markets were struck with uncertainty on effects of a bank failure of one institution, the uncertainty followed the whole European banking industry. Herd behavior is used as an explanation for the behavior of investors and as a reason for the spreading of the mispricing phenomenon. Belief perseverance, on the other hand, is used to find an explanation why the phenomenon persisted. In the analysis I found that some of the institutions bounced back better after the catastrophic event, yet there is no evidence of a correction in the data for equity risk premium and stress test placement. These findings should help to better understand how a global (Europe-wide) shock affects companies from different regions. Institutions based in more stable countries and regions are not rewarded for their more risk averse portfolios as they should be

Investor Sentiment in Japanese and U.S. Daily Mutual Fund Flows

We find evidence that is consistent with the hypothesis that daily mutual fund flows may be instruments for investor sentiment about the stock market. We use this finding to construct a new index of investor sentiment, and validate this index using data from both the United States and Japan. In both markets exposure to this factor is priced, and in the Japanese case, we document evidence of negative correlations between Bull' and Bear' domestic funds. The flows to bear foreign funds in Japan display some evidence of negative correlation to domestic and foreign equity funds, suggesting that there is a foreign vs. domestic sentiment factor in Japan that does not appear in the contemporaneous U.S. data. By contrast, U.S. mutual fund investors appear to regard domestic and foreign equity mutual funds as economic substitutes.

The effects of twitter sentiment on renewable energy stock's returns : a Portuguese study about EDP renováveis stocks

Investors’ rationality in the decision-making process has been topic of discussion in the last decades due to conflicts between schools of thought. Several anomalies in the Efficient Market Hypothesis (EMH) led to a new line of thought in the matter of rationality called behavior finance. Sentiment analysis is one branch of this new school of thought who studies investors’ emotions influence on economic variables. There is no consensus between academics if these emotions can make the investment decision biased or not. The aim of this paper is to observe if the prevailing sentiment in tweets can predict the stock returns for a renewable energy company of the Portuguese market. This study looks at the second biggest company by capitalizations of the Portuguese market, EDP Renováveis (EDPR), in the period from the June 1st 2021, to June 1st 2022, and finds no significant evidence of a relationship between Twitter mood and EDP Renováveis stock returns. The reasons for this result might be explained by EDPR belonging to a very small and concentrated market, corroborating the existing theory, as well as the stakeholder composition of the company only having a very small percentage of individual investors, being this kind of investors the most influenced by biases and heuristics present in the tweets. These findings have implications for the development of the sentiment analysis theory, giving more details of the influence of sentiment in smaller and concentrated market, in the renewable energy branch, and in the period of the beginning of the war between Ukraine and Russia and the worldwide economic recovery from the Covid-19 pandemic.A racionalidade dos investidores no processo de decisão de investimento tem sido tópico de discussão nas últimas décadas devido ao conflito entre duas linhas de pensamento diferentes. Várias anomalias que não iam de encontro com a hipótese do mercado eficiente deram origem a uma nova escola de pensamento em relação à racionalidade dos investidores chamada de finanças comportamentais. Análise de sentimentos é um dos ramos desta nova linha de pensamento que estuda a influência das emoções dos investidores em diferentes variáveis económicas. Não existe consenso entre académicos se estas emoções conseguem enviesar as decisões de investimento ou não. O objetivo desta tese é observar se o sentimento presente em tweets consegue fazer prever os retornos das ações de uma empresa de energias renováveis do mercado português. Este estudo analisa a segunda maior empresa portuguesa por capitalizações, a EDP Renováveis (EDPR), no período temporal entre o dia 1 de junho de 2021 e o dia 1 de julho de 2022, e não encontrou evidência com significância de uma relação entre o estado de espírito do Twitter e os retornos das ações da EDP Renováveis. As razões que justificam estes resultados podem ser o facto da EDPR pertencer a um mercado muito pequeno e concentrado como o português, indo de encontro com a evidência empírica, assim como a composição dos proprietários das ações da empresa ter uma percentagem muito reduzida de investidores individuais, que são o tipo de investidor mais facilmente influenciado por heurísticas presentes nos tweets. Este resultado tem implicações para o desenvolvimento da teoria de análise do sentimento, dando mais detalhes da influência deste em mercados mais pequenos e concentrados, no ramo das energias Renováveis, no período de tempo do início da guerra entre a Ucrânia e a Rússia e a recuperação financeira mundial pós-Covid-19

Closed-end Fund Discounts and Interest Rates: Positive Covariance in US Data after 1985

Previous papers find no relationship between interest rates and the discounts of US closed-end funds before 1985. This is taken as evidence against management fees being a cause of discounts because a negative relationship is expected: if interest rates rise, you would expect to see discounts fall as the present value of future fees is reduced. But from 1985 forward, there has been a strong positive relationship between interest rates and discounts. This supports an alternative view in which the discount varies positively with interest rates because bond yields are an alternative return against which closed-end funds must compete.

An Empirical Investigation of Retail Investors’ Sentiments: Role of Demographics

Purpose: This paper is an explicit effort to explore the various tenets of Investors’ sentiments in Indian context. The purpose of this paper is to examine the Investors’ Sentiments and to know how investors sentiments affects the choices made by retail investors and to know how demographic characteristics drive investment decisions of individuals.   Methodology: In carrying out this research study a descriptive design is used. A sample of 683 respondents (retail investors) were selected as part of a sample utilizing the snowball (chain referral) method of sampling. The instrument used for collecting primary data is a well-structured questionnaire and it consists of demographic profiles of respondents.   Findings: The attitude of investors’ towards investment decision is influenced by perceived returns, price sensitive information, perceived economic indicators, investors’ confidence and herd behavior. These results emphasize the significance of individual propensities in determining a person’s level of sentiments.   Implications: This study will help financial advisors to better understand the attitudes and behaviors of their clients and also be significant for financial institutions, given to positive economic effects of development of financial sector

Large share price movements, reasons and market reaction

The objective of this paper is to examine the reasons of firm-level one-day share price shocks and post -shock reaction. Positive and negative shocks are defined and detected by using the official news providers, which are required to disclose price-sensitive information. No information that accompanied one-day share price shocks was found. It is suggested that irrational behavior by uninformed investors drives the stock market returns. The reaction to these large price movements has been investigated as part of the overreaction hypothesis and the results were supportive of short-term price reversal in the case of price declines