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Some studies suggest investor sentiment significantly influences stock returns, particularly for small-cap and difficult-to-value stocks, while other studies indicate it has little predictive power for near-term future returns and primarily affects market volatility and liquidity.
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Investor sentiment plays a crucial role in financial markets, influencing stock prices and returns. This synthesis explores the relationship between investor sentiment and financial market returns, drawing on multiple research studies to provide a comprehensive understanding of this dynamic.
Correlation Between Sentiment and Market Returns:
Impact on Different Types of Stocks:
Institutional vs. Individual Investor Sentiment:
Sentiment Proxies and Measurement:
Behavioral Finance and Market Anomalies:
Geographical Differences and Spillover Effects:
Investor sentiment is a significant factor in financial markets, influencing stock returns, particularly for stocks that are harder to value and more susceptible to speculative demand. While sentiment has a strong correlation with current market returns, its predictive power for future returns is limited. Institutional sentiment tends to align prices with intrinsic values, whereas individual sentiment impacts smaller stocks more. Various proxies are used to measure sentiment, with VIX being particularly effective. Sentiment-driven market anomalies highlight the importance of considering behavioral factors in financial analysis. Geographical differences and spillover effects further complicate the relationship between sentiment and market returns.
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