Title: Role of investor sentiment in financial markets: an explanation by behavioural finance approach

Authors: Nizar Raissi; Sahbi Missaoui

Addresses: Finance Department, College of Islamic Economics and Finance, Umm al Qura University, P.O. Box 715, Postal code 21421, Makkah, KSA ' Finance Department, College of Islamic Economics and Finance, Umm al Qura University, P.O. Box 715, Postal code 21421, Makkah, KSA

Abstract: The present paper has two objectives. The first is to analyse the correlation between investor sentiment and stock returns. The second is to explain the relationship between the financial market liquidity and the behaviour of its actors. From this perspective, we demonstrate that the investor sentiment is an important factor in generation of the stock performance based on the criterion of market capitalisation class shares, and then the investor sentiment is a combination of other indicators, including liquidity indicators of the financial market. Consequently, there exists a relationship between investor sentiment and stock returns. Thus, to verify this relationship, we studied a sample of 80 French industrial companies during a period of 58 months from January 2005 to October 2009. We have obtained the first result that investor sentiment is an explanatory variable only for small-caps returns. For the second result, we confirmed that the liquidity of the financial market deserves the role of sentiment measure. For the third result, we have proved that there is a significant correlation between investor sentiment and only the stock returns of small-cap. Finally, for the fourth result, we have validated the hypothesis showing that market liquidity can predict the psychological situation of investors.

Keywords: investor sentiment; liquidity indicators; financial markets; behavioural finance; stock returns; investor psychology.

DOI: 10.1504/IJAF.2015.076182

International Journal of Accounting and Finance, 2015 Vol.5 No.4, pp.362 - 401

Received: 02 Feb 2015
Accepted: 20 Jan 2016

Published online: 26 Apr 2016 *

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