Market Response to Investor Sentiment

26 Pages Posted: 16 Feb 2009 Last revised: 4 May 2010

See all articles by Jördis Hengelbrock

Jördis Hengelbrock

University of Bonn - The Bonn Graduate School of Economics

Erik Theissen

University of Mannheim - Finance Area

Christian Westheide

University of Vienna - Department of Finance; Goethe University Frankfurt - Research Center SAFE

Multiple version iconThere are 2 versions of this paper

Date Written: May 3, 2010

Abstract

Recent empirical research suggests that measures of investor sentiment have predictive power for future stock returns over the intermediate and long term. Given the widespread publication of sentiment indicators, smart investors should trade on the information conveyed by such indicators and thus trigger an immediate market response to their publication. The present paper is the first to empirically analyze whether an immediate response can be identified from the data. We use survey-based sentiment indicators from two countries (Germany and the US). Consistent with previous research we find there is predictability at intermediate time horizons. For the US, however, the predictability all but disappears after 1994. Using event study methodology we find that the publication of sentiment indicators affects market returns. The sign of the immediate response is the same as that of the predictability over the intermediate term. This finding is consistent with the idea that sentiment is related to mispricing, but is inconsistent with the idea that the sentiment indicator provides information about future expected returns.

Keywords: Investor Sentiment, Event Study, Return Predictability

JEL Classification: G12, G14

Suggested Citation

Hengelbrock, Jördis and Theissen, Erik and Westheide, Christian, Market Response to Investor Sentiment (May 3, 2010). Available at SSRN: https://ssrn.com/abstract=1343798 or http://dx.doi.org/10.2139/ssrn.1343798

Jördis Hengelbrock

University of Bonn - The Bonn Graduate School of Economics ( email )

Adenauerallee 24-26
Bonn, D-53113
Germany

Erik Theissen

University of Mannheim - Finance Area ( email )

Mannheim, 68131
Germany

Christian Westheide (Contact Author)

University of Vienna - Department of Finance ( email )

Bruennerstrasse 72
Vienna, 1210
Austria

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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