The relationship between market sentiment index and stock rates of return: A panel data analysis

Main Article Content

Claudia Emiko Yoshinaga
Francisco Henrique Figueiredo de Castro Junior

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.

Downloads

Download data is not yet available.

Article Details

How to Cite
Yoshinaga, C. E., & Castro Junior, F. H. F. de. (2012). The relationship between market sentiment index and stock rates of return: A panel data analysis. Brazilian Administration Review, 9(2), 189-210. https://doi.org/10.1590/S1807-76922012000200005
Section
Articles