The article defines investor sentiment as the propensity of an investor to speculate stocks. This is an attitude primarily related to the psychological mindset of investors. When in positive states, they are likely to pursue routine techniques, while in negative states, they tend to make more consideration before they invest. Sometimes, they can become less attentive, as a result of which stocks tend to be mispriced. A normal investor will make investment decisions without sentimental motivation, while the bullish or bearish ones will expect much higher or lower returns than the average investors will. This often overvalues stocks above their fundamental value and results in bursting the market bubble. Traditionally, in relation to the finance theory, the price of a stock is roughly equal to the current value of expected cash flows from the same cross-section of expected returns, thus, can only be explained by analysing cross-section risks. Although the authors have focused on giving traditional approaches to determining the prices of stocks, they have not offered the best strategies that are being applied in the contemporary business world.
The article maintains that, in theory, investor sentiment has no role in stock returns. Nonetheless, this has been debated over the years since a lot of evidence suggests that there might be traders who significantly affect returns, and who are primarily motivated by sentiment. Literature survey shows that, while scholars have used numerous factors to explain returns, the interconnection between risk factors and returns in Bangladesh has been described as being generally a weak one. In Bangladesh, even stock beta cannot explain the cross-section that determines the returns on investment in the Dhaka Stock Exchange. Some studies propose that there is a negative connection between returns and beta. However, others argue that in the case of a young firm, those growing very fast and for those that do not pay dividends, there is a high possibility of valuations that result in stocks becoming more susceptible to sentiments. It is evident that the researchers have attempted to cite some sources, but the sources used are not enough. They could have done better by utilising more studies that were accomplished in the past.
There is limited data on survey-based literature with regard to the Bangladesh stock market. Therefore, this constrains the investigations to a limited number of factors or their valuations, such as trade volume or IPOs carried out per month. These variables are rarely accessible from vendors. Therefore, for purposes of investigations, they have to be created from legal data, because sentiment proxies often have similar information tools, such as the Kalman, that are used to zero down on an individual sentiment measure. From statistical calculations on these data, the results serve to explain the actions of noise traders. Thus, sentiment returns can be described on the platforms of ‘hold more’ and ‘price pressure’, owing to the influence of noise traders.
The hold more effect implies that noise traders with riskier assets than experienced traders may make more returns, while the price pressure implies that the bullishness of noise traders tend to escalate the price of assets. Research findings suggest that sentiment factors can explain stock returns since they are highly likely to be proxies for market risk. Ergo, sentiment factors are weak explicators of individual stock returns when extra market factors are included in the model. Solid levels of cash returns are influenced by cash flow news and the return an investor expects. In fact, the firm’s value can be equated to all future cash flows. Given that sentiment is a source of market-wide risk, one would expect that it would have a greater influence on portfolios than individual stocks. This would explain the major impact of sentiment on portfolio returns, but weak on the value of returns for individual firms. This paper concludes that sentiment indeed plays a major role in the Bangladesh stock market given that, among other things, there is a unidirectional connection shifting from the TRIN to returns on the stock. In addition, there is a bi-directional causal one between retrospective changes in the moving mean and return on stocks. The most dominant investors in emerging markets, such as Bangladesh, are new and uniformed without the benefit of quality information or the services of professional analysts, which makes markets highly vulnerable to the sentiment that such investors inevitably bring. In this context, the authors have failed to explain some of the benefits that are associated with the sentiment that is brought by new investors. The paper could be improved if the authors used other factors to explain the impact of sentiment on stock prices. It appears that the behavioural approach used is not satisfactory.
The article has two main shortcomings. First, some of the sources given are not within the required timeframe of five years. This reduces the extent to which readers can rely on the assertions of the authors. Second, the methods used in the article are not clear with regard to approaches used to identify the sample. When conducting studies, authors should aim at justifying why they use their samples from the population. That notwithstanding, the findings of the authors would have practical implications for players in the field of stock trade across the world.
Reference
Chowdhury, Shah Saeed Hassan, et al. “Effect of Sentiment on the Bangladesh Stock Market Returns.” SSRN Electronic Journal, 2014. Crossref, Web.