Investor Sentiment and its Role in Asset Pricing: An Empirical Study of the American Stock Market

Brahim Salem

Investor Sentiment and its Role in Asset Pricing: An Empirical Study of the American Stock Market

Brahim Salem *

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Investor Sentiment and its Role in Asset Pricing: An Empirical Study of the American Stock Market

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Abstract

Our paper tries to examine the relationship between investor sentiment and its effect on assets pricing. To this end, we proceeded in two ways. First, we conducted econometric tests to identify the investor sentiment measure that best reflects variations not explained by fundamentals. As part of this empirical study, we used two measures of investor sentiment based on sample surveys. The tests show that the investor sentiment index of SENTAAII is the most appropriate proxy that explains variations unexplained by fundamentals in the American market. Second, inspired by the work of DSSW (1990), we tested the impact of “noise trader” risk, both on excess returns and on their volatilities. To this end, we used a TGARCH-M model which, like Lee, Jiang and Indro (2004), to examine the relationship between market volatility, excess returns and investor sentiment. Our results on the American market show, first, that change in investor sentiment has a significant effect on excess returns. On the other hand, change in investor sentiment has a significant effect on the conditional volatility of the American stock market which causes an increase (decrease) in excess returns.

References

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Funding

No external funding was declared for this work.

Conflict of Interest

The authors declare no conflict of interest.

Ethical Approval

No ethics committee approval was required for this article type.

Data Availability

Not applicable for this article.

How to Cite This Article

Brahim Salem. 2015. "Investor Sentiment and its Role in Asset Pricing: An Empirical Study of the American Stock Market". Global Journal of Management and Business Research - C: Finance GJMBR-C Volume 14 (GJMBR Volume 14 Issue C6).

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Journal Specifications

Crossref Journal DOI 10.17406/GJMBR

Print ISSN 0975-5853

e-ISSN 2249-4588

Keywords

Behavioral Finance create space effect freidman effect hold more effect noise traders price pressure effect

Classification

GJMBR-C Classification JEL Code: G12

Submission ReceivedDecember 16, 2013
Peer Review Double Blind
Handling Editor
Accepted January 4, 2014
Published January 15, 2014

Version of record

v1.2

Issue date

January 17, 2015

Language

English

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Article Matrices

Total Score: 148

Country: Tunisia

Subject: Global Journal of Management and Business Research

Authors: Brahim Salem (PhD/Dr. count: 0)

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