Analyses for the effects of investor sentiment on the price adjustment behaviors for stock market and REIT market

Shu Ling Chiang and Ming Shann Tsai

International Review of Economics & Finance, 2023, vol. 86, issue C, 425-439

Abstract: This study examines the effects of investor sentiment on the asymmetric price adjustment behaviors for real estate investment trusts (REIT) and the stock prices by applying the threshold error correction (EC) model. The regimes in the threshold EC model are defined by the investor sentiment indicators, such as: the VIX index, the VXO index, the put/call ratio, and two Google search indexes. The empirical results reveal that the asymmetric price adjustment behaviors and the causality effects were different when using the different indicators of investor sentiments to define the regimes. The other main findings are summarized as follows: First, the price adjustment behaviors and lead-lag relationships for both REITs and stock returns indeed exhibits asymmetric effects under different investor sentiments. Second, the coefficients of price adjustment are significantly negative values under most regimes. It implies that these two markets exhibit significant error-correction behavior when short-term market disequilibrium occurs. Third, for most cases, if market participants are strongly bearish or pay higher attention (i.e., in the upper regime), they will quickly adjust their portfolios in response to an economic shock. Fourth, the efficiency of the price adjustment behavior is greater in the REIT market than in the stock market. Finally, for most regimes, there are two-way causalities between the two markets. Our results should help market participants from the perspective of investor sentiment to undertake optimal investment strategies for their portfolios.

Keywords: Threshold error correction model; Cointegration; REITs; Asymmetric; Price adjustments (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:86:y:2023:i:c:p:425-439

DOI: 10.1016/j.iref.2023.03.007

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