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Role of investor sentiment in financial markets: an explanation by behavioural finance approach

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  • Nizar Raissi
  • Sahbi Missaoui

Abstract

The present paper has two objectives. The first is to analyse the correlation between investor sentiment and stock returns. The second is to explain the relationship between the financial market liquidity and the behaviour of its actors. From this perspective, we demonstrate that the investor sentiment is an important factor in generation of the stock performance based on the criterion of market capitalisation class shares, and then the investor sentiment is a combination of other indicators, including liquidity indicators of the financial market. Consequently, there exists a relationship between investor sentiment and stock returns. Thus, to verify this relationship, we studied a sample of 80 French industrial companies during a period of 58 months from January 2005 to October 2009. We have obtained the first result that investor sentiment is an explanatory variable only for small-caps returns. For the second result, we confirmed that the liquidity of the financial market deserves the role of sentiment measure. For the third result, we have proved that there is a significant correlation between investor sentiment and only the stock returns of small-cap. Finally, for the fourth result, we have validated the hypothesis showing that market liquidity can predict the psychological situation of investors.

Suggested Citation

  • Nizar Raissi & Sahbi Missaoui, 2015. "Role of investor sentiment in financial markets: an explanation by behavioural finance approach," International Journal of Accounting and Finance, Inderscience Enterprises Ltd, vol. 5(4), pages 362-401.
    • Handle: RePEc:ids:intjaf:v:5:y:2015:i:4:p:362-401
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    Cited by:

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