Individual Investor Sentiment and Stock Returns - What Do We Learn from Warrant Traders?

34 Pages Posted: 25 Mar 2005 Last revised: 7 Oct 2009

See all articles by Markus Glaser

Markus Glaser

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

Philipp Schmitz

University of Applied Sciences Aachen

Martin Weber

University of Mannheim - Department of Banking and Finance

Date Written: October 2, 2009

Abstract

In this paper, we propose a measure of individual investor sentiment that is derived from the market for bank-issued warrants. Due to a unique warrant transaction data set from a large discount broker we are able to calculate a daily sentiment measure and test whether individual investor sentiment is related to daily stock returns by using vector autoregressive models and Granger causality tests. We find that there exists a mutual influence of sentiment and stock market returns, but only in the very short-run (one and two trading days). Returns have a negative influence on sentiment, while the influence of sentiment on returns is positive for the next trading day. This result is mainly driven by experienced investors and investors with high levels of investor sophistication. Even though our sentiment measure circumvents several drawbacks of existing sentiment measures which are based on the closed-end fund discount, stock market transactions, the put-call ratio, or investor surveys, our results cast doubt on whether sentiment measures are useful to predict stock market returns over horizons of more than one day. Nevertheless, our analysis provides evidence on how individual investors trade and which determinants influence their expectations.

Keywords: Sentiment, Bank-issued Warrants, Covered Warrants, Individual Investors, Investor Behavior, VAR models, Return Predictability, Stock Index Returns

JEL Classification: D14, G1

Suggested Citation

Glaser, Markus and Schmitz, Philipp and Weber, Martin, Individual Investor Sentiment and Stock Returns - What Do We Learn from Warrant Traders? (October 2, 2009). Available at SSRN: https://ssrn.com/abstract=923526 or http://dx.doi.org/10.2139/ssrn.923526

Markus Glaser (Contact Author)

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Schackstra├če 4
Munich, 80539
Germany

Philipp Schmitz

University of Applied Sciences Aachen ( email )

No Address Available
Germany

Martin Weber

University of Mannheim - Department of Banking and Finance ( email )

D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)

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