Investor Sentiment in the Stock Market

Topics: Stock market, Finance, Stock Pages: 1 (281 words) Published: March 10, 2013
Investor Sentiment in the Stock Market
The Investor Sentiment in the Stock Market is a very interesting article. The following are my findings.

From the article, I know that real investors and markets are too complicated to be stated by a few biases. The top down approach to behavioral finance focuses on the measurement of reduced form, aggregate sentiment and traces its effects to stock returns. In particular, stocks of low capitalization, younger, unprofitable, high volatility, non-dividend paying, growth companies, or stocks of firms in financial distress, are likely to be disproportionately sensitive to broad waves of investor sentiment.

The author introduces that investor sentiment could affect their behaviors and the whole stock market. There are two types of investors: rational arbitrageurs who are sentiment-free and irrational traders prone to exogenous sentiment. Because of these two types of investors, the mispricing of stocks arises out from change in sentiment on part of the irrational traders and the limit to arbitrage from rational ones. The higher sentiment increases, the speculative stocks will have higher returns, and those stocks that are younger, smaller, more volatile, unpredictable, non-dividend paying, distressed, would be most sensitive to investor sentiment. I am interested in how the investor sentiment can be measured. As the author mentioned, we regard sentiment as exogenous at very first step, but now it shows quite possible to measure investor sentiment, even we can describe out the waves of sentiment, than we find out that these information we described is important, regular on individual firms and on the stock market. We can also take other exogenous into consideration for further research, such as investor physical condition, investor personal hobbies, etc.
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