Individual And Institutional Investor Sentiment And Stock Returns

Behavioral finance theory has caught more and more attentions nowadays. As an important branch of it, investor sentiment also plays a significant role on the market. Basing on the data of Chinese securities market and the shanghai A-share listed companies from the period of2005to2011, the article makes a comparative study between the effects of individual and institutional investor sentiment, in order to clarify the roles of them in the stock market. Previous studies have been mostly concerned about the interactions of them or one of their impacts. We focus on both and go deep into the stock level from a new perspective that is quantifying the sensitivity of stock returns to investor sentiment changes by rolling regression.Basing on DSSW model and the actual situation of Chinese market, this paper sets up a theoretical model which considers the interactions of individual and institutional investor sentiment. The new accounts of them in each month were used to construct their sentiment index and we adopt the distributed lag model (PDLs) to investigate the interaction mechanism between individual and institutional investor sentiment. Then, the paper studies the relationship between individual, institutional investor sentiment and stock returns from market and stock level.In the aspect of market influence, this article applies OLS regression analysis method which modified by White to study the effect of different investor sentiment on market returns. Moreover, we consider the background of financial crisis in the process. In the aspect of stock influence, this article uses the rolling regression method to quantify the sensitivity of stock return to investor sentiment changes. Then, we select a series of characteristic instructions which are from the unique view of investors’ attention to construct portfolio, and we also explore if there are characteristic differences in these different sensitivity portfolio.The results show that:the interaction of individual and institutional investor sentiment is asymmetric. The influence of institutional investor sentiment to individual investor sentiment is greater. And institutional investor sentiment can predict individual investor sentiment, while the converse is not true. The individual investor sentiment will positively affect market returns over the same period. While the institutional investor sentiment exhibit significant positive correlation with market returns only in lag period, the effect on the same period is not obvious. This result is consistent with the idea that the institutions are relatively rational as their sentiment can predict the market returns. In addition, the sensitivity of the stock returns to investor sentiment changes is comparatively higher to those securities whose investors’attention is higher. This phenomenon has showed consistency between sensitivity of stock returns to both individual and institutional sentiment changes. Consistent with this prediction, we find that if the sensitivity of stock returns to sentiment changes is high, These stocks are usually high price stocks, high turnover stocks, high abnormal trading volume stocks, small stocks, high P/B stocks, low B/M stocks, high operating income growth rate stocks, high ratio of institutional investors holding share stocks, low concentration of ownership stocks, high momentum effect stocks and positive earnings per share stocks. When the sensitivity is low, on the other hand, these characteristics are reversed too.