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The role of stock price synchronicity on the return-sentiment relation

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  • Rao, Lanlan
  • Zhou, Liyun

Abstract

Traditional finance leaves no roles for investor sentiment on account of the efficient information and arbitrage. This paper investigates how information adjusts the individual stock investor sentiment effects on stock prices. We find that the return-sentiment relations on stocks with low stock price synchronicity outperform those with high stock price synchronicity. Moreover, the return-sentiment relations remain positive and significant among stock portfolios doubled-sorted by stock price synchronicity and limit-of-arbitrage variables, which implies that limits of arbitrage worsen information environment and weaken the roles of stock price synchronicity on the return-sentiment relation. Finally, this paper decomposes the individual stock investor sentiment and confirms the roles of the components of individual stock investor sentiment on stock prices. Overall, this paper confirms the roles of individual stock investor sentiment on stock prices.

Suggested Citation

  • Rao, Lanlan & Zhou, Liyun, 2019. "The role of stock price synchronicity on the return-sentiment relation," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 119-131.
    • Handle: RePEc:eee:ecofin:v:47:y:2019:i:c:p:119-131
    DOI: 10.1016/j.najef.2018.12.008
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    Cited by:

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    4. Gaganis, Chrysovalantis & Leledakis, George & Pasiouras, Fotios & Pyrgiotakis, Emmanouil, 2021. "National culture of secrecy and stock price synchronicity: Cross-country evidence," MPRA Paper 105432, University Library of Munich, Germany.
    5. Zheng, Shuxia & Zhang, Xiaoming & Wang, Hu, 2023. "Green credit policy and the stock price synchronicity of heavily polluting enterprises," Economic Analysis and Policy, Elsevier, vol. 77(C), pages 251-264.
    6. Ahmed, Walid M.A., 2020. "Stock market reactions to domestic sentiment: Panel CS-ARDL evidence," Research in International Business and Finance, Elsevier, vol. 54(C).

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    More about this item

    Keywords

    Behavioral finance; Stock price synchronicity; Limit of arbitrage; Individual stock investor sentiment; Stock prices;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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