Does sentiment matter for stock market returns? Evidence from a small European market

Abstract

Using Portuguese stock market returns, at the aggregate and industry levels, over the period 1997-2009, we find that the EU Economic Sentiment Indicator (ESI) and Consumer Confidence Index are driven by both rational and irrational factors. Irrational ESI is significantly negatively related to stock returns. Sentiment negatively forecasts aggregate stock market returns, but not all industry index returns. We find no contagious effect of US investor sentiment in the Portuguese market returns.