Investor sentiment and the market reaction to macroeconomic news

Chen Gu, Denghui Chen and Raluca Stan

Journal of Futures Markets, 2021, vol. 41, issue 9, 1412-1426

Abstract: We provide evidence that the stock market response to macroeconomic news weakens in times of high investor sentiment. The reaction to macroeconomic information is 50% weaker in times of elevated bullish investor sentiment, relative to periods of low sentiment. This dampening effect holds for both good and bad macroeconomic news. Investor sentiment seems to hinder the incorporation of public information into asset prices. Our findings shed new light on how investor sentiment affects the link between fundamentals and security prices.

Date: 2021
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