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

Abstract

An important issue in finance is whether noise traders, those who act on information that has no value, influence prices. Recent research indicates that investor sentiment affects the return distribution of a few categories of assets in some stock markets. Other studies also document that US investor sentiment is contagious. This paper investigates whether Consumer Confidence (CC) and the Economic Sentiment Indicator (ESI) – as proxies for investor sentiment – affects Portuguese stock market returns, at aggregate and industry levels, for the period between 1997 to 2009. Moreover the impact of US investor sentiment on Portuguese stock market returns is also addressed. We find several interesting results. First, our results provide evidence that consumer confidence index and ESI are driven by both, rational and irrational factors. Second, ESI is significantly negative related to stock returns. Sentiment negatively forecasts aggregate stock market returns, but not all industry indices returns. Finally, we don’t find a contagious effect of US investor sentiment in Portuguese market returns.