Table of Contents

Handbook of Behavioral Finance

Handbook of Behavioral Finance

Elgar original reference

Edited by Brian Bruce

The Handbook of Behavioral Finance is a comprehensive, topical and concise source of cutting-edge research on recent developments in behavioral finance.

Chapter 18: The Impact of Business and Consumer Sentiment on Stock Market Returns: Evidence from Brazil

Pablo Calafiore, Gökçe Soydemir and Rahul Verma

Subjects: economics and finance, behavioural and experimental economics, economic psychology, financial economics and regulation

Extract

Pablo Calafiore, Gökçe Soydemir and Rahul Verma INTRODUCTION In recent years there has been a lively debate on the possible linkages between the behavioral aspects of investors and stock returns. Researchers such as Black (1986), Trueman (1988), DeLong et al. (DSSW) (1990, 1991), Shleifer and Summers (1990), Lakonishok et al. (1992), Campbell and Kyle (1993), Shefrin and Statman (1994), Palomino (1996), Barberis et al. (1998), Daniel et al. (1998) and Hong and Stein (1999) provide the theoretical framework describing the role of investor sentiment in determining stock prices. An implication of these studies is that noise traders, acting as a group of investors who do not make investment decisions based on a company’s fundamentals, are capable of affecting stock prices by way of unpredictable changes in their responses. Several empirical studies examine the influence of sentiments on stock returns based on the ‘noise trader model’ of DSSW (1990) (Brown and Cliff, 2004, 2005; Lee et al., 2002; Fisher and Statman, 2000; Clarke and Statman, 1998; Solt and Statman 1988; De Bondt, 1993). In general, these studies provide evidence for the existence of strong comovements between individual and institutional investor sentiment and stock market returns. The previous literature on investor sentiment and stock prices provides inconclusive results on whether causal effects are attributable to rational risk factors, or noise or some combination of both. These studies simply infer that sentiment is fully irrational; however, no empirical test is conducted to investigate the extent to which sentiment may be rational...

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