was one of the leading advocates of this hypothesis and his pioneering or

Was one of the leading advocates of this hypothesis

This preview shows page 3 - 5 out of 15 pages.

was one of the leading advocates of this hypothesis and his pioneering or shaped literature on this domain. Over the last few decades, major market collapses have compelled scholars to think beyond economic and financial variables to incorporate emotional aspects of stock investments. In the past twenty years, the sphere of behavioral finance has made inroads in outlining the influence of emotions on investment decisions. According to a study carried out by Wang, Li, & Lin (2012), human sentiments are clear indicators in determining final security prices compared to other financial variables. Currently, the main challenge pertains to the operationalization of the sentimental aspect to measure its role in stock market returns. There are explicit proxies that directly tap investors’ responses and implicit proxies that rely on market statistics or trading patterns. In view of Chi, Zhuang, & Song (2011), there are numerous implicit proxies, which aid in measuring different impacts on the behavior of stock prices. However, in this study, the author
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INVESTORS’ SENTIMENTS 4 endeavors to look into proxies that not only measure these influences but also are relevant to the existing situations within the area of study (global emerging and developed markets). Literature Review The behavior of stock prices is affected by a number of factors. However, in this paper, these markets are analyzed through the lens of investor sentiments based on the notion that changes in traders’ attitudes affect their investment decisions. In a study carried out by Finter, Ruenzi, & Ruenzi (2012), the authors concluded that more sentiment sensitive stocks are small, young, and grow at low dividend yields. In view of this study, if sentimental elements are to be priced, then, high sensitive stocks ought to attract greater yields compared to stocks with low sensitivity to sentiments. Additionally, Da, Engelberg, & Gao (2015) use a new technique to explore sentiment known as “the sum of all fears” whereby the browsed the Internet for household queries including bankruptcy, recession, and unemployment. They used the total volume of their search terms to create their ‘FEAR index’ and utilized it as a proxy in measuring the link between sentiment and asset prices. The findings from their index confirmed the index’s ability to predict cumulative market return and were correlated to the present’s low returns and predict future high returns. What is more, they observed that the index had a stronger impact on stocks that were preferred by sentiment investors and impossible to arbitrage. Baker, Wurgler, & Yuan (2009) argued that market-wide sentiment often exercise unprecedented influence on stocks, which are difficult to arbitrage and assess. In particular, the authors found out that investor sentiment had a deleterious impact on value stocks despite having no influence on growth stocks. Stambaugh, Yu, & Yuan (2012) demonstrated that several anomalies are witnessed in stocks that follow high levels of sentiment. Notably, the authors confirmed that international sentiment is a contrarian predictor of reruns at the country level.
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  • Fall '15
  • Mr. Njoroge

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