The Impact of Investor Sentiment on the German Stock Market
30 Pages Posted: 4 Aug 2010 Last revised: 7 Sep 2010
Date Written: July 28, 2010
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
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