Does investor sentiment matter in New Zealand and Australian stock markets?

Abstract

Investor sentiment is an important aspect of behavioral finance, which provides explanations to anomalies such as January effect, Momentum effect, and Monday effect. More and more evidences suggest that sentiment of investors can effectively affect returns, but most of empirical researches investigate American and European stock markets rather than New Zealand and Australian stock markets. Thus, this paper focus on this gap, intending to study and compare effects of investor sentiment on stock returns in these countries. This paper uses Consumer Confidence Index (CCI) and trade volume as sentiment proxies from 2004 to 2017. It also employs macro-economic variables such as IPI, GDP, inflation rate and interest rate to investigate the aggregate effects of sentiments. Based on book-to-market ratio and DPS, this paper divides whole sample into subsamples to study the cross-sectional effects of sentiment on different portfolios. This paper finds that in the short term, investors’ sentiment can positively predict stock returns but not in the long term. This finding partly support existing empirical researches. In addition, the results also suggest that with the increase of forecast horizon, the predictive power of sentiment will decrease.