Assessing the reversal of investor sentiment

Cherng G. Ding, Hung-Jui Wang, Meng-Che Lee, Wen-Chi Hung and Ten-Der Jane

The North American Journal of Economics and Finance, 2021, vol. 58, issue C

Abstract: Assessing the reversal of sentiment in stock markets is needed because, according to the social mood cycle, the change of social mood over time is an antecedent of price movements. The purpose of this study is to empirically assess reversal of investor sentiment, to show the phases of social mood cycle from increasing mood to decreasing mood, and to explain the dynamic change in market inefficiency from increasing to decreasing. Growth modeling, developed particularly for dealing with the change over time, is used in this study for assessing the reversal of investor sentiment. The autocovariance structure of errors and the variances/covariances of the random coefficients are all taken into account in the model. The results have indicated that the change in investor sentiment over time is inverted U-shaped for the entire market. Moreover, arbitrage constraint and stock characteristics exert a joint moderating effect on sentiment reversal. Less arbitrage constraint can strengthen sentiment reversal only when the market for individual stocks is dominated by noise traders. Based on the results obtained, we discuss asset pricing, liquidity management, and market intervention.

Keywords: Reversal of investor sentiment; Social mood cycle; Growth modeling; Market liquidity (search for similar items in EconPapers)
JEL-codes: G40 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:58:y:2021:i:c:s1062940821001571

DOI: 10.1016/j.najef.2021.101547

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