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The impact of investor sentiment on the German stock market

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  • Finter, Philipp
  • Niessen-Ruenzi, Alexandra
  • Ruenzi, Stefan

Abstract

This paper develops a broad-based sentiment indicator for Germany and investigates whether investor sentiment can explain stock returns on the German stock market. Based on a principal component analysis, we construct a sentiment indicator that condenses information of several well-known sentiment proxies. We show that this indicator explains the return spread between sentiment sensitive stocks and stocks that are not sensitive to sentiment fluctuations. Specifically, stocks that are difficult to arbitrage and hard to value are sensitive to the indicator. However, we do not find much predictive power of sentiment for future stock returns.

Suggested Citation

  • Finter, Philipp & Niessen-Ruenzi, Alexandra & Ruenzi, Stefan, 2011. "The impact of investor sentiment on the German stock market," CFR Working Papers 10-03 [rev.], University of Cologne, Centre for Financial Research (CFR).
    • Handle: RePEc:zbw:cfrwps:1003r
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    1. Deven Bathia & Don Bredin, 2013. "An examination of investor sentiment effect on G7 stock market returns," The European Journal of Finance, Taylor & Francis Journals, vol. 19(9), pages 909-937, October.
    2. Kumari, Jyoti, 2019. "Investor sentiment and stock market liquidity: Evidence from an emerging economy," Journal of Behavioral and Experimental Finance, Elsevier, vol. 23(C), pages 166-180.
    3. Bormann, Sven-Kristjan, 2013. "Sentiment indices on financial markets: What do they measure?," Economics Discussion Papers 2013-58, Kiel Institute for the World Economy (IfW Kiel).
    4. Saumya Ranjan Dash & Jitendra Mahakud, 2013. "Investor Sentiment and Stock Return: Do Industries Matter?," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 7(3), pages 315-349, August.
    5. Chandana Gunathilaka & Mohamad Jais & Sophee Sulong Balia, 2017. "Illiquidity, Investor Sentiment and Stock Returns: Evidence from Malaysia," International Journal of Economics and Financial Issues, Econjournals, vol. 7(4), pages 478-487.
    6. Nico Singer & Saskia Laser & Frank Dreher, 2013. "Published stock recommendations as investor sentiment in the near-term stock market," Empirical Economics, Springer, vol. 45(3), pages 1233-1249, December.
    7. Singer, Nico & Dreher, Frank & Laser, Saskia, 2012. "Published stock recommendations as institutional investor sentiment in the near-term stock market," Thuenen-Series of Applied Economic Theory 121, University of Rostock, Institute of Economics.

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    More about this item

    Keywords

    investor sentiment; stock returns; German stock market;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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