The Impact of Investor Sentiment on the German Stock Market

30 Pages Posted: 4 Aug 2010 Last revised: 7 Sep 2010

See all articles by Philipp Finter

Philipp Finter

University of Cologne - Centre for Financial Research (CFR); University of Cologne - Department of Finance

Alexandra Niessen-Ruenzi

University of Mannheim, Department of Finance; University of Mannheim - Department of Finance

Stefan Ruenzi

University of Mannheim - Department of International Finance

Date Written: July 28, 2010

Abstract

This paper investigates whether investor sentiment can explain stock returns on the German stock market. Based on a principal component analysis, we construct a sentiment indicator that condenses information of several well-known sentiment proxies. We show that this indicator explains the return spread between sentiment stocks and stocks that are not sensitive to sentiment fluctuations. Specifically, stocks that are difficult to arbitrage and hard to value are sensitive to the indicator. However, we do not find much predictive power of sentiment for future stock returns. This is consistent with sentiment being of minor importance on the German stock market that is characterized by a low fraction of retail investors.

Keywords: Investor Sentiment, Stock Returns, German Stock Market

JEL Classification: G12, G14

Suggested Citation

Finter, Philipp and Finter, Philipp and Niessen-Ruenzi, Alexandra and Niessen-Ruenzi, Alexandra and Ruenzi, Stefan, The Impact of Investor Sentiment on the German Stock Market (July 28, 2010). Available at SSRN: https://ssrn.com/abstract=1650164 or http://dx.doi.org/10.2139/ssrn.1650164

Philipp Finter (Contact Author)

University of Cologne - Centre for Financial Research (CFR) ( email )

Albertus-Magnus Platz
Cologne, 50923
Germany

University of Cologne - Department of Finance ( email )

Cologne, 50923
Germany

Alexandra Niessen-Ruenzi

University of Mannheim - Department of Finance ( email )

Mannheim, 68131
Germany

University of Mannheim, Department of Finance ( email )

L9, 1-2
Mannheim, 68131
Germany
+49 621 181 1595 (Phone)

Stefan Ruenzi

University of Mannheim - Department of International Finance ( email )

L9, 1-2
Mannheim, 68131
Germany

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