Resumen de The causal relationship between sentiment proxies and stock returns

Pedro Manuel Nogueira Reis, Carlos Pinho

• This paper aims to study the causality power of a vast group of sentiment proxies for European S&P 350 constituents monthly stock returns over a long-term period (more than 45 years). It applies a GMM estimation to dynamic panel data for the short run and long run influences along with Granger causality. Our findings support the role of several investor sentiment measures in stock returns even after the presence of strong group control variables such as fundamentals, macroeconomic, market and technical analysis. Implied volatility in stock options sentiment measures, such as VIX and VSTOXX, put and call ratios, gold, government bond yield spreads, mispricing along with economic and confidence sentiment indicators are combined indicators for measuring how the irrational behaviors of investor determine stock returns. Co-movements between markets coexist proving the existence of contagion. Furthermore, net debt issues and equity issues emerge as irrelevant to evaluating sentiment. Behavioral and investor psychology ought to be especially watched in times when non-material variables drive most market movements and co-movements, such as sentiments including confidence, disbelief or the prevailing level of optimism or pessimism. Considering the unobservable nature of sentiment, we provide a set of sentiment proxies, including new measures such as gold, government yields spread and a mispricing ratio, that serve to predict European market returns. European investor sentiment studies and their causal relations with stock returns are still quite scarce. Furthermore, to our knowledge this study is the first to apply time dynamic panel data estimation to a large set of sentiment proxies and a set of complete control variables in a long-term framework.