The relationship between market sentiment index and stock rates of return: a panel data analysis
Open Access
- 1 June 2012
- journal article
- Published by FapUNIFESP (SciELO) in BAR - Brazilian Administration Review
- Vol. 9 (2), 189-210
- https://doi.org/10.1590/s1807-76922012000200005
Abstract
This article analyzes the relationship between market sentiment and future stock rates of return. We used a methodology based on principal component analysis to create a sentiment index for the Brazilian market with data from 1999 to 2008. The sample consisted of companies listed on BM&F BOVESPA which were grouped into quintiles, each representing a portfolio, according to the magnitude of the following characteristics: market value, total annualized risk and listing time on BM&F BOVESPA. Next, we calculated the average return of each portfolio for every quarter. The data for the first and last quintiles were analyzed via two-factor ANOVA, using sentiment index of the previous period (positive or negative) as the main factor and each characteristic as controlling factors. Finally, the sentiment index was included in a panel data pricing model. The results indicate a significant and negative relationship between the market sentiment index and the future rates of return. These findings suggest the existence of a reversion pattern in stock returns, meaning that after a positive sentiment period, the impact on subsequent stock returns is negative, and vice-versa.Keywords
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