IDEAS home Printed from https://ideas.repec.org/p/zbw/vfsc16/145836.html
   My bibliography  Save this paper

Bidirectional Relationship between Investor Sentiment and Excess Returns: New Evidence from the Wavelet Perspective

Author

Listed:
  • Marczak, Martyna
  • Beissinger, Thomas

Abstract

We propose to use the wavelet concept of the phase angle to determine the lead-lag relationship between investor sentiment and excess returns that are related to the bubble component of stock prices. The wavelet phase angle allows for decoupling short- and long-run relations and is additionally capable of identifying time-varying comovement patterns. Based on the monthly S&P500 index and two alternative monthly US sentiment indicators we find that in the short run (until 3 months) sentiment is leading returns whereas for periods above 3 months the opposite can be observed. Moreover, the initially strong positive relationship becomes less pronounced with increasing time horizon, thereby indicating that the over- or undervaluation in the short run is gradually corrected in the long run.

Suggested Citation

  • Marczak, Martyna & Beissinger, Thomas, 2016. "Bidirectional Relationship between Investor Sentiment and Excess Returns: New Evidence from the Wavelet Perspective," VfS Annual Conference 2016 (Augsburg): Demographic Change 145836, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc16:145836
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/145836/1/VfS_2016_pid_6908.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Martyna Marczak & Thomas Beissinger, 2013. "Real wages and the business cycle in Germany," Empirical Economics, Springer, vol. 44(2), pages 469-490, April.
    2. Dergiades, Theologos, 2012. "Do investors’ sentiment dynamics affect stock returns? Evidence from the US economy," Economics Letters, Elsevier, vol. 116(3), pages 404-407.
    3. David Hirshleifer & Tyler Shumway, 2003. "Good Day Sunshine: Stock Returns and the Weather," Journal of Finance, American Finance Association, vol. 58(3), pages 1009-1032, June.
    4. Baker, Malcolm & Stein, Jeremy C., 2004. "Market liquidity as a sentiment indicator," Journal of Financial Markets, Elsevier, vol. 7(3), pages 271-299, June.
    5. Gregory W. Brown & Michael T. Cliff, 2005. "Investor Sentiment and Asset Valuation," The Journal of Business, University of Chicago Press, vol. 78(2), pages 405-440, March.
    6. Marczak, Martyna & Gómez, Víctor, 2015. "Cyclicality of real wages in the USA and Germany: New insights from wavelet analysis," Economic Modelling, Elsevier, vol. 47(C), pages 40-52.
    7. Malcolm Baker & Jeffrey Wurgler, 2006. "Investor Sentiment and the Cross‐Section of Stock Returns," Journal of Finance, American Finance Association, vol. 61(4), pages 1645-1680, August.
    8. Michis, Antonis A., 2014. "Time scale evaluation of economic forecasts," Economics Letters, Elsevier, vol. 123(3), pages 279-281.
    9. Malcolm Baker & Jeffrey Wurgler, 2007. "Investor Sentiment in the Stock Market," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 129-152, Spring.
    10. David M. Cutler & James M. Poterba & Lawrence H. Summers, 1991. "Speculative Dynamics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(3), pages 529-546.
    11. Luís Aguiar-Conraria & Maria Joana Soares, 2014. "The Continuous Wavelet Transform: Moving Beyond Uni- And Bivariate Analysis," Journal of Economic Surveys, Wiley Blackwell, vol. 28(2), pages 344-375, April.
    12. 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.
    13. Trezzi, Riccardo, 2013. "A wavelet analysis of international risk-sharing," Economics Letters, Elsevier, vol. 118(2), pages 330-333.
    14. Alex Edmans & Diego García & Øyvind Norli, 2007. "Sports Sentiment and Stock Returns," Journal of Finance, American Finance Association, vol. 62(4), pages 1967-1998, August.
    15. De Bondt, Werner F M & Thaler, Richard, 1985. "Does the Stock Market Overreact?," Journal of Finance, American Finance Association, vol. 40(3), pages 793-805, July.
    16. Brown, Gregory W. & Cliff, Michael T., 2004. "Investor sentiment and the near-term stock market," Journal of Empirical Finance, Elsevier, vol. 11(1), pages 1-27, January.
    17. Paul C. Tetlock, 2007. "Giving Content to Investor Sentiment: The Role of Media in the Stock Market," Journal of Finance, American Finance Association, vol. 62(3), pages 1139-1168, June.
    18. Kim, Soon-Ho & Kim, Dongcheol, 2014. "Investor sentiment from internet message postings and the predictability of stock returns," Journal of Economic Behavior & Organization, Elsevier, vol. 107(PB), pages 708-729.
    19. Jinfang Li, 2015. "The asymmetric effects of investor sentiment and monetary policy on stock prices," Applied Economics, Taylor & Francis Journals, vol. 47(24), pages 2514-2522, May.
    20. Poterba, James M. & Summers, Lawrence H., 1988. "Mean reversion in stock prices : Evidence and Implications," Journal of Financial Economics, Elsevier, vol. 22(1), pages 27-59, October.
    21. Michael Lemmon & Evgenia Portniaguina, 2006. "Consumer Confidence and Asset Prices: Some Empirical Evidence," The Review of Financial Studies, Society for Financial Studies, vol. 19(4), pages 1499-1529.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Dash, Saumya Ranjan & Maitra, Debasish, 2018. "Does sentiment matter for stock returns? Evidence from Indian stock market using wavelet approach," Finance Research Letters, Elsevier, vol. 26(C), pages 32-39.
    2. Ngoc Bao Vuong, Yoshihisa Suzuki, 2020. "Does Fear has Stronger Impact than Confidence on Stock Returns?The Case of Asia-Pacific Developed Markets," Analele Stiintifice ale Universitatii "Alexandru Ioan Cuza" din Iasi - Stiinte Economice, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 67, pages 157-175, July.
    3. Angeliki Skoura, 2019. "Detection of Lead-Lag Relationships Using Both Time Domain and Time-Frequency Domain; An Application to Wealth-To-Income Ratio," Economies, MDPI, vol. 7(2), pages 1-27, April.
    4. Ngoc Bao Vuong & Yoshihisa Suzuki, 2020. "Does Fear has Stronger Impact than Confidence on Stock Returns? The Case of Asia-Pacific Developed Markets," Scientific Annals of Economics and Business (continues Analele Stiintifice), Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 67(2), pages 157-175, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ung, Sze Nie & Gebka, Bartosz & Anderson, Robert D.J., 2023. "Is sentiment the solution to the risk–return puzzle? A (cautionary) note," Journal of Behavioral and Experimental Finance, Elsevier, vol. 37(C).
    2. Wang, Wenzhao & Duxbury, Darren, 2021. "Institutional investor sentiment and the mean-variance relationship: Global evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 191(C), pages 415-441.
    3. Tiwari, Aviral Kumar & Abakah, Emmanuel Joel Aikins & Bonsu, Christiana Osei & Karikari, Nana Kwasi & Hammoudeh, Shawkat, 2022. "The effects of public sentiments and feelings on stock market behavior: Evidence from Australia," Journal of Economic Behavior & Organization, Elsevier, vol. 193(C), pages 443-472.
    4. Kim Kaivanto & Peng Zhang, 2019. "Investor Sentiment as a Predictor of Market Returns," Working Papers 268005798, Lancaster University Management School, Economics Department.
    5. 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.
    6. Li, Xiao & Shen, Dehua & Xue, Mei & Zhang, Wei, 2017. "Daily happiness and stock returns: The case of Chinese company listed in the United States," Economic Modelling, Elsevier, vol. 64(C), pages 496-501.
    7. Xiong Xiong & Chunchun Luo & Ye Zhang & Shen Lin, 2019. "Do stock bulletin board systems (BBS) contain useful information? A viewpoint of interaction between BBS quality and predicting ability," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(5), pages 1385-1411, March.
    8. Zhang, Yongjie & Zhang, Yuzhao & Shen, Dehua & Zhang, Wei, 2017. "Investor sentiment and stock returns: Evidence from provincial TV audience rating in China," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 466(C), pages 288-294.
    9. Kim, Jun Sik & Ryu, Doojin & Seo, Sung Won, 2014. "Investor sentiment and return predictability of disagreement," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 166-178.
    10. Fang, Hao & Chung, Chien-Ping & Lu, Yang-Cheng & Lee, Yen-Hsien & Wang, Wen-Hao, 2021. "The impacts of investors' sentiments on stock returns using fintech approaches," International Review of Financial Analysis, Elsevier, vol. 77(C).
    11. Zhang, Wei & Li, Xiao & Shen, Dehua & Teglio, Andrea, 2016. "Daily happiness and stock returns: Some international evidence," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 460(C), pages 201-209.
    12. Siganos, Antonios & Vagenas-Nanos, Evangelos & Verwijmeren, Patrick, 2014. "Facebook's daily sentiment and international stock markets," Journal of Economic Behavior & Organization, Elsevier, vol. 107(PB), pages 730-743.
    13. Aissia, Dorsaf Ben, 2016. "Home and foreign investor sentiment and the stock returns," The Quarterly Review of Economics and Finance, Elsevier, vol. 59(C), pages 71-77.
    14. Kostopoulos, Dimitrios & Meyer, Steffen, 2018. "Disentangling investor sentiment: Mood and household attitudes towards the economy," Journal of Economic Behavior & Organization, Elsevier, vol. 155(C), pages 28-78.
    15. Edmans, Alex & Fernandez-Perez, Adrian & Garel, Alexandre & Indriawan, Ivan, 2022. "Music sentiment and stock returns around the world," Journal of Financial Economics, Elsevier, vol. 145(2), pages 234-254.
    16. Mahmoudi, Nader & Docherty, Paul & Melia, Adrian, 2022. "Firm-level investor sentiment and corporate announcement returns," Journal of Banking & Finance, Elsevier, vol. 144(C).
    17. Ruan, Qingsong & Wang, Zilin & Zhou, Yaping & Lv, Dayong, 2020. "A new investor sentiment indicator (ISI) based on artificial intelligence: A powerful return predictor in China," Economic Modelling, Elsevier, vol. 88(C), pages 47-58.
    18. Malcolm Baker & Jeffrey Wurgler, 2007. "Investor Sentiment in the Stock Market," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 129-152, Spring.
    19. Seok, Sang Ik & Cho, Hoon & Ryu, Doojin, 2019. "Firm-specific investor sentiment and daily stock returns," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).
    20. Szymon Lis, 2022. "Investor Sentiment in Asset Pricing Models: A Review," Working Papers 2022-14, Faculty of Economic Sciences, University of Warsaw.

    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:vfsc16:145836. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/vfsocea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.