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Does the Investor Sentiment Affect the Stock Returns in Taiwan’s Stock Market under Different Market States?

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  • Yu-Hong Liu
  • Syuan-Rong Dai
  • Fu-Min Chang
  • Yih-Bey Lin
  • Nicholas Rueilin Lee

Abstract

Climatic change and epidemic disease could influence the investor sentiment. Under such circumstances, how to invest the stock market in different stock market states (bull, bear or neutral) is an important topic for investors. To capture the investor sentiment more precisely, we use principal component analysis to analyze some investor sentiment indicators, and then form a composite index of investor sentiment. These investor sentiment indicators include the turnover rate, the percent change in margin borrowing, the percent change in short interest, net buy/sell, the turnover ratio of major institutional investors, psychological line, and advance decline ratio. Then we construct regression models to investigate the influences of investor sentiment on the current returns and on the near-term future returns in the different market states, respectively. The empirical results revealed that investor sentiment indicators have significantly positive effect on stock returns during total period, bull market and neutral market. Among these market states, bull market has the greatest influence. When the market is an upward tendency, investors will be willing to put funds into the stock market. When the funds flow in, it occurs Bandwagon effect easily, so that the stock price deviates from the reasonable price. JEL classification numbers: E22, G30, P34

Suggested Citation

  • Yu-Hong Liu & Syuan-Rong Dai & Fu-Min Chang & Yih-Bey Lin & Nicholas Rueilin Lee, 2020. "Does the Investor Sentiment Affect the Stock Returns in Taiwan’s Stock Market under Different Market States?," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 10(5), pages 1-3.
    • Handle: RePEc:spt:apfiba:v:10:y:2020:i:5:f:10_5_3
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    References listed on IDEAS

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    Cited by:

    1. Rameeza Andleeb & Arshad Hassan, 2023. "Impact of Investor Sentiment on Contemporaneous and Future Equity Returns in Emerging Markets," SAGE Open, , vol. 13(3), pages 21582440231, August.
    2. Ngoc Bao Vuong & Yoshihisa Suzuki, 2022. "The Moderating Effect of Market-Specific Factors on the Return Predictability of Investor Sentiment," SAGE Open, , vol. 12(3), pages 21582440221, July.

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    More about this item

    Keywords

    Investor Sentiment; Principal Component Analysis; Stock Returns; Market states.;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • P34 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Finance

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