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New Evidence on Psychology and Stock Returns

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  • Nicholas Mangee

Abstract

This article provides econometric evidence on the importance of psychological considerations for aggregate stock price fluctuations. To this end, a novel measure of stock market sentiment, dubbed the Net Psychology Index (NPI), based on information contained in Bloomberg News's end-of-the-day stock market reports, is confronted with a battery of multivariate empirical analyses. Results suggest that NPI is statistically different from popular sentiment proxies within the literature. NPI exhibits predictive power, increasing stock returns in the short run with this impact dissipating in the medium term. NPI does not exhibit asymmetric effects on returns for size- and momentum-related portfolios. A trading strategy based on NPI generates a statistically significant positive monthly return. Recursive out-of-sample fit analyses report a lower standard deviation of forecasting errors for NPI-based returns models versus competing accounts.

Suggested Citation

  • Nicholas Mangee, 2017. "New Evidence on Psychology and Stock Returns," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 18(4), pages 417-426, October.
    • Handle: RePEc:taf:hbhfxx:v:18:y:2017:i:4:p:417-426
    DOI: 10.1080/15427560.2017.1344676
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    Cited by:

    1. Bouteska, Ahmed, 2019. "The effect of investor sentiment on market reactions to financial earnings restatements: Lessons from the United States," Journal of Behavioral and Experimental Finance, Elsevier, vol. 24(C).
    2. Roman Frydman & Soeren Johansen & Anders Rahbek & Morten Nyboe Tabor, 2019. "The Knightian Uncertainty Hypothesis: Unforeseeable Change and Muth�s Consistency Constraint in Modeling Aggregate Outcomes," Discussion Papers 19-02, University of Copenhagen. Department of Economics.
    3. Roman Frydman & Soren Johansen & Anders Rahbek & Morten Tabor, 2019. "The Knightian Uncertainty Hypothesis: Unforeseeable Change and Muth`s Consistency Constraint in Modeling Aggregate Outcomes," Working Papers Series 92, Institute for New Economic Thinking.
    4. Sang Ik Seok & Hoon Cho & Chanhi Park & Doojin Ryu, 2019. "Do Overnight Returns Truly Measure Firm-Specific Investor Sentiment in the KOSPI Market?," Sustainability, MDPI, vol. 11(13), pages 1-14, July.
    5. Muhammad Ateeq ur REHMAN & Syed Ghulam Meran SHAH & Lucian-Ionel CIOCA & Alin ARTENE, 2021. "Accentuating the Impacts of Political News on the Stock Price, Working Capital and Performance: An Empirical Review of Emerging Economy," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 55-73, June.
    6. Seok, Sang Ik & Cho, Hoon & Ryu, Doojin, 2019. "Firm-specific investor sentiment and the stock market response to earnings news," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 221-240.

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