An examination of investor sentiment effect on G7 stock market returns

Abstract

This paper examines the relationship between investor sentiment and G7 stock market returns. Using a range of investor sentiment proxies, including investor survey, equity fund flow, closed-end equity fund (CEEF) discount and equity put–call ratio, we examine if investor sentiment has a significant influence on value and growth stock returns as well as aggregate market returns. Using monthly data for the period January 1995–December 2007, our results depict a negative relationship between investor sentiment and future returns. We find results that are consistent with previous studies in that when investor sentiment is high (low), future returns are low (high). Our panel results display evidence of commonality across all the sentiment measures with the value stocks having a particularly strong effect relative to growth stocks. Furthermore, the effect of survey sentiment on future returns gradually decreases beyond the one-month forecast horizon. We observe evidence of price pressure on value stocks and the overall market due to increases in concurrent equity fund flow. Finally, the discount of CEEFs is also found to proxy for investor sentiment, with a narrower discount being associated with an increase (decrease) in value (growth) stocks.