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Article
Publication date: 5 May 2015

Stephan Lang and Wolfgang Schaefers

Recent studies in the field of behavioral finance have highlighted the importance of investor sentiment in the return-generating process for general equities. By employing…

Abstract

Purpose

Recent studies in the field of behavioral finance have highlighted the importance of investor sentiment in the return-generating process for general equities. By employing an asset pricing framework, this paper aims to evaluate the performance of European real estate equities, based on their degree of sentiment sensitivity.

Design/methodology/approach

Using a pan-European data set, we classify all real estate equities according to their sentiment sensitivity, which is measured relative to the Economic Sentiment Indicator (ESI) of the European Commission. Based on their individual sentiment responsiveness, we form both a high- and low-sensitivity portfolio, whose returns are included in the difference test of the liquidity-augmented asset pricing model. In this context, we analyze the performance of sentiment-sensitive and sentiment-insensitive real estate equities with a risk-adjusted perspective over the period July 1995 to June 2012.

Findings

While high-sensitivity real estate equities yield significantly higher raw returns than those with low-sensitivity, we find no evidence of risk-adjusted outperformance. This indicates that allegedly sentiment-driven return behavior is in fact merely compensation for taking higher fundamental risks. In this context, we find that sentiment-sensitive real estate equities are exposed to significantly higher market risks than sentiment-insensitive ones. Based on these findings, we conclude that a sentiment-based investment strategy, consisting of a long-position in the high-sensitivity portfolio and a short-position in the low-sensitivity one, does not generate a risk-adjusted profit.

Research limitations/implications

Although this study sheds some light on investor sentiment in European real estate stock markets, further research could usefully concentrate on alternative sentiment proxies.

Originality/value

This is the first study to disentangle the relationship between investor sentiment and European real estate stock returns.

Details

Journal of European Real Estate Research, vol. 8 no. 1
Type: Research Article
ISSN: 1753-9269

Keywords

Article
Publication date: 16 February 2022

Cathy Xuying Cao and Chongyang Chen

This paper examines the relation between political sentiment and future stock price crash risk.

Abstract

Purpose

This paper examines the relation between political sentiment and future stock price crash risk.

Design/methodology/approach

This study employs firm-level political sentiment from earnings conference calls. The empirical analysis applies panel regressions on 40,254 US firm-year observations between 2002 and 2020, controlling for various firm-specific determinants of crash risk and firm-, industry- as well as time-fixed effects.

Findings

The study identifies a negative association between both the level and the change of political sentiment and stock crash risk. Further analysis shows that the predictive power of political sentiment is independent of either non-political sentiment or political risk and remains consistently strong during periods of either high or low economic policy uncertainty. Moreover, the predictive effect of political sentiment is more pronounced for firms with high litigation risk.

Research limitations/implications

The evidence highlights the important role of political sentiment in predicting stock crash risk. The results are consistent with the signaling hypothesis that managers tend to use their tone in conference calls to convey informative messages on firm outlooks.

Practical implications

The study provides a recommendation on risk management: soft information such as political and non-political sentiment in earnings conference calls is useful in managing stock crash risk. The study findings also call for careful consideration of social costs, such as stock crash risk, associated with political policies. Ill-conceived policies may lead to market crashes, which can potentially outweigh the upsides of well-meaning political reforms.

Originality/value

To the authors best knowledge, this is the first study to identify the effect of time-varying firm-level political sentiment conveyed in conference calls on stock price crash.

Details

The Journal of Risk Finance, vol. 23 no. 2
Type: Research Article
ISSN: 1526-5943

Keywords

Article
Publication date: 20 March 2017

Hsin-Hui Chiu and Lu Zhu

This paper aims to examine the information content of mutual fund flows and its indication on investors’ preference/tolerance toward risk.

Abstract

Purpose

This paper aims to examine the information content of mutual fund flows and its indication on investors’ preference/tolerance toward risk.

Design/methodology/approach

Mutual funds are grouped into different categories based on assets with different levels of risk perceptions (e.g. equity fund, money market fund), and this information is publicly accessible. This paper examines the correlation patterns between fund flows and changes in credit default swaps (CDS) spreads. In addition, it also examines such a relation by dividing the samples into different fund types (e.g. retail vs institutional fund flows).

Findings

This paper suggests that equity fund flows are negatively related to CDS spreads, whereas money market fund flows are positively related to CDS spreads. Furthermore, it indicates that retail fund flows provide insightful information and serve as the primary driver behind the relation between fund flows and CDS spreads.

Originality/value

The findings of this paper indicate that flows into equity and money market funds could serve as a risk sentiment in credit markets. And this is the first study, to the best of the author’s knowledge, to establish such a linkage between fund flows and CDS spreads to help investors gauge credit market sentiment.

Details

The Journal of Risk Finance, vol. 18 no. 2
Type: Research Article
ISSN: 1526-5943

Keywords

Article
Publication date: 12 July 2021

Shahzad Hussain, Muhammad Akbar, Qaisar Ali Malik, Tanveer Ahmad and Nasir Abbas

The purpose of this paper is to examine the impact of corporate governance, investor sentiment and financial liberalization on downside systematic risk and the interplay…

Abstract

Purpose

The purpose of this paper is to examine the impact of corporate governance, investor sentiment and financial liberalization on downside systematic risk and the interplay of socio-political turbulence on this relationship through static and dynamic panel estimation models.

Design/methodology/approach

The evidence is based on a sample of 230 publicly listed non-financial firms from Pakistan Stock Exchange (PSX) over the period 2008–2018. Furthermore, this study analyzes the data through Blundell and Bond (1998) technique in the full sample as well sub-samples (big and small firms).

Findings

The authors document that corporate governance mechanism reduces the downside risk, whereas investor sentiment and financial liberalization increase the investors’ exposure toward downside risk. Particularly, the results provide some new insights that the socio-political turbulence as a moderator weakens the impact of corporate governance and strengthens the effect of investor sentiment and financial liberalization on downside risk. Consistent with prior studies, the analysis of sub-samples reveals some statistical variations in large and small-size sampled firms. Theoretically, the findings mainly support agency theory, noise trader theory and the Keynesians hypothesis.

Originality/value

Stock market volatility has become a prime area of concern for investors, policymakers and regulators in emerging economies. Primarily, the existence of market volatility is attributed to weak governance, irrational behavior of market participants, the liberation of financial policies and sociopolitical turbulence. Therefore, the present study provides simultaneous empirical evidence to determine whether corporate governance, investor sentiment and financial liberalization hinder or spur downside risk in an emerging economy. Furthermore, the work relates to a small number of studies that examine the role of socio-political turbulence as a moderator on the relationship of corporate governance, investor sentiment and financial liberalization with downside systematic risk.

Details

Journal of Asia Business Studies, vol. 16 no. 1
Type: Research Article
ISSN: 1558-7894

Keywords

Article
Publication date: 8 January 2020

Tony McGough and Jim Berry

In the light of past financial and economic turmoil, there has been a marked increase in the volatility in real estate markets. This has impacted on the pricing of…

Abstract

Purpose

In the light of past financial and economic turmoil, there has been a marked increase in the volatility in real estate markets. This has impacted on the pricing of property assets, partly through market sentiment and particularly concerning risk. It also limits modelling accuracy model accuracy. The purpose of this paper is to create a new variable and model to enhance analysis of what drives real estate yields incorporating market sentiment to risk.

Design/methodology/approach

This paper specifically considers the modelling of property pricing within a volatile economic environment. The theoretical context begins by analysing the relationship between property yields and government bonds. The analytical context then moves on to specifically include a measurement of risk which stresses its role and importance in investment markets since the Global Financial Crisis. The model thus incorporates macroeconomic and real estate data, together with an international risk multiplier, which is calculated within the paper.

Findings

The paper finds the use of measurements of market sentiment and risk are more powerful tools for modelling yields than previous techniques alone.

Research limitations/implications

This is an initial paper outlining the creation of sentiment and risk measurements in the financial market and showing an example of its application to a commercial real estate market. The implication is that this could add a major new explanatory variable to modelling of yields.

Practical implications

The paper highlights the importance of risk in the pricing of commercial real estate, over and above normal variables. It highlights how this can help explain over and undershooting of yields within commercial real estate which would be of great importance in the investment world.

Originality/value

This paper attempts to explicitly measure market sentiment, pricing of risk and how this impacts real estate pricing.

Details

Journal of Property Investment & Finance, vol. 38 no. 5
Type: Research Article
ISSN: 1463-578X

Keywords

Article
Publication date: 13 February 2017

Subramanian Rama Iyer and Joel T. Harper

The purpose of this paper is to test whether investors take flight to safety when sentiment is low. In other words, do safe firms perform better than risky firms following…

2303

Abstract

Purpose

The purpose of this paper is to test whether investors take flight to safety when sentiment is low. In other words, do safe firms perform better than risky firms following periods of low sentiment.

Design/methodology/approach

Using cash flow volatility and the percent of bullish investors as proxies for risk and investor sentiment the paper tests the relationship between sentiment and returns conditional on risk this performance. Second, a cross-sectional analysis is conducted based on individual firm characteristics and sentiment to explain annual returns.

Findings

The paper finds that there is a negative relationship between investor sentiment and the return of risky companies, which is contrary to prior studies. All told, risky companies perform worse following periods of high investor sentiment.

Originality/value

This paper presents evidence contrary to extant literature and that there is no concerted flight to safety. Investor sentiment has little influence on safe stocks.

Details

Managerial Finance, vol. 43 no. 2
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 7 December 2020

Tihana Škrinjarić, Zrinka Lovretin Golubić and Zrinka Orlović

This paper aims to analyze the effects of investors’ sentiment, return and risk series on one to another of selected exchange rates. The empirical analysis consists of a…

Abstract

Purpose

This paper aims to analyze the effects of investors’ sentiment, return and risk series on one to another of selected exchange rates. The empirical analysis consists of a time-varying inter-dependence between the observed variables, with the focus on spillovers between the variables.

Design/methodology/approach

Monthly data on the index Sentix, exchange rates EUR–USD, EUR–CHF and EUR–JPY are analyzed from February 2003 to December 2019. The applied methodology consists of vector autoregression models (VAR) with Diebold and Yilmaz (2009, 2011) spillover indices.

Findings

The results of the empirical research indicate that using static analysis could result in misleading conclusions, with dynamic analysis indicating that the financial of 2007-2008 and specific negative events increase the spillovers of shock between the observed variables for all three exchange rates. The sources of shocks in the model change over time because of variables changing their positions being net emitters and net receivers of shocks.

Research limitations/implications

The shortfalls of this study include using the monthly data frequency, as this was available for the authors, namely, investors are interested to obtain new information on a weekly and daily basis, not only monthly. However, at the time of writing this research, we could obtain only monthly data.

Practical implications

As the obtained results are in line with previous literature and were found to be robust, there exists the potential to use such analysis in the future when forecasting risk and return series for portfolio management purposes. Thus, a basic comparison was made regarding the investment strategies, which were based on the results from the estimation. It was shown that using information about shock spillovers could result in strategies that can obtain better portfolio value over time compared to basic benchmark strategies.

Originality/value

First, this paper allows for the spillovers of shocks in variables within the VAR models in all directions. Second, a dynamic analysis is included in the study. Third, the mentioned spillover indices are included in the study as well.

Details

Studies in Economics and Finance, vol. 38 no. 1
Type: Research Article
ISSN: 1086-7376

Keywords

Article
Publication date: 18 May 2021

Prajwal Eachempati and Praveen Ranjan Srivastava

A composite sentiment index (CSI) from quantitative proxy sentiment indicators is likely to be a lag sentiment measure as it reflects only the information absorbed in the…

Abstract

Purpose

A composite sentiment index (CSI) from quantitative proxy sentiment indicators is likely to be a lag sentiment measure as it reflects only the information absorbed in the market. Information theories and behavioral finance research suggest that market prices may not adjust to all the available information at a point in time. This study hypothesizes that the sentiment from the unincorporated information may provide possible market leads. Thus, this paper aims to discuss a method to identify the un-incorporated qualitative Sentiment from information unadjusted in the market price to test whether sentiment polarity from the information can impact stock returns. Factoring market sentiment extracted from unincorporated information (residual sentiment or sentiment backlog) in CSI is an essential step for developing an integrated sentiment index to explain deviation in asset prices from their intrinsic value. Identifying the unincorporated Sentiment also helps in text analytics to distinguish between current and future market sentiment.

Design/methodology/approach

Initially, this study collects the news from various textual sources and runs the NVivo tool to compute the corpus data’s sentiment polarity. Subsequently, using the predictability horizon technique, this paper mines the unincorporated component of the news’s sentiment polarity. This study regresses three months’ sentiment polarity (the current period and its lags for two months) on the NIFTY50 index of the National Stock Exchange of India. If the three-month lags are significant, it indicates that news sentiment from the three months is unabsorbed and is likely to impact the future NIFTY50 index. The sentiment is also conditionally tested for firm size, volatility and specific industry sector-dependence. This paper discusses the implications of the results.

Findings

Based on information theories and empirical findings, the paper demonstrates that it is possible to identify unincorporated information and extract the sentiment polarity to predict future market direction. The sentiment polarity variables are significant for the current period and two-month lags. The magnitude of the sentiment polarity coefficient has decreased from the current period to lag one and lag two. This study finds that the unabsorbed component or backlog of news consisted of mainly negative market news or unconfirmed news of the previous period, as illustrated in Tables 1 and 2 and Figure 2. The findings on unadjusted news effects vary with firm size, volatility and sectoral indices as depicted in Figures 3, 4, 5 and 6.

Originality/value

The related literature on sentiment index describes top-down/ bottom-up models using quantitative proxy sentiment indicators and natural language processing (NLP)/machine learning approaches to compute the sentiment from qualitative information to explain variance in market returns. NLP approaches use current period sentiment to understand market trends ignoring the unadjusted sentiment carried from the previous period. The underlying assumption here is that the market adjusts to all available information instantly, which is proved false in various empirical studies backed by information theories. The paper discusses a novel approach to identify and extract sentiment from unincorporated information, which is a critical sentiment measure for developing a holistic sentiment index, both in text analytics and in top-down quantitative models. Practitioners may use the methodology in the algorithmic trading models and conduct stock market research.

Article
Publication date: 24 August 2021

Tony McGough and Jim Berry

The financial and economic turmoil that resulted from the Global Financial Crisis (GFC), included a marked increase in the volatility in real estate markets. Property…

Abstract

Purpose

The financial and economic turmoil that resulted from the Global Financial Crisis (GFC), included a marked increase in the volatility in real estate markets. Property asset prices were impacted by the real economy and market sentiment, particularly concerning the determination of risk. In an economic downturn, the perception of investment risk becomes increasingly important relative to overall total returns, and thus impacts on yields and performance of assets. In a recovery phase, and particularly within an environment of historically low government bonds, risk and return compete for importance. The aim of this paper is to assess the interrelationships and impacts on pricing between real estate risk, yield modelling outcomes and market sentiment in selective European city office markets.

Design/methodology/approach

This paper specifically considers the modelling of commercial property pricing in relation to the appetite for risk in the financial markets. The paper expands on previous work by determining a specific measure of risk pricing in relationship to changing financial market sentiment. The methodology underpinning the research specifically examines the scope for using national and international risk pricing within specific real estate markets in Europe.

Findings

This paper addresses whether there is a difference between the impact of risk on the pricing of real estate in international versus regional cities in Europe. The analysis, therefore, determines which city centre office markets in Europe have been most impacted by globalisation including the magnitude on real estate prices and market volatility. The outcome of the paper provides important insights into how changes in risk preferences in the international capital markets have driven and continues to drive yield movements under different market conditions.

Research limitations/implications

The paper considers the driving forces which have led to the volatile movements of yields, emanating from the GFC.

Practical implications

This paper considers the property market effects on pricing of commercial real estate and the drivers in selected European cities.

Originality/value

The outcome of the paper provides important insights into how changes in risk preferences in the international capital markets have driven and continue to drive the yield movements in different real estate markets in Europe.

Details

Journal of European Real Estate Research, vol. 15 no. 2
Type: Research Article
ISSN: 1753-9269

Keywords

Article
Publication date: 21 August 2019

Qiang Bu

The purpose of this paper is to create a quantitative measure that captures the effects of investor sentiment in an objective way.

Abstract

Purpose

The purpose of this paper is to create a quantitative measure that captures the effects of investor sentiment in an objective way.

Design/methodology/approach

The author introduced risk estimation bias (REB) to examine the effects of forecasting error of future market volatility on fund alpha. The author also used GARCH to model the volatility of the REB.

Findings

The author documented a statistically significant relation between REB and realized market volatility. The author also found that the REB plays a significant role in explaining fund alpha.

Originality/value

REB is the first quantitative measure to examine the effects of investor sentiment on risk estimation and fund performance. The GRACH properties of REB provide important information on how investor sentiment fluctuates over time.

Details

Review of Behavioral Finance, vol. 11 no. 4
Type: Research Article
ISSN: 1940-5979

Keywords

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