Anomalies and Investor Sentiment: Empirical Evidences in the Brazilian Market.
| Autor | Xavier, Gustavo Correia |
| Cargo | Report |
Introduction
International literature has been extensively investigating the impact of investor sentiment on financial markets. To measure sentiment, Baker and Wurgler (2006) constructed an index based on proxies for investor behavior and demonstrated that this measure can significantly predict future returns, especially for the riskiest and hardest-to-arbitrage stocks. Since then, this index has been widely used in empirical research as an aggregate measure for investor sentiment in the US market. In this sense, evidences have been found that establish a strong relation between sentiment index and market anomalies (Antoniou, Doukas, & Subrahmanyam, 2010; Stambaugh, Yu, & Yuan, 2012). The theoretical justification is that some anomalies may reflect, at least in part, mispricing deriving from unsophisticated investors' behavior.
The premise that investor sentiment has a significant impact on determining stock values has been used in a number of studies that analyze the relationship between returns and an investor sentiment index, producing evidence that sentiment does have an influence on stock prices (Baker & Wurgler, 2006, 2007; Baker, Wurgler, & Yuan, 2012; Barberis, Shleifer, & Vishny, 1998; Brown & Cliff, 2004; Delong, Shleifer, Summers, & Waldmann, 1990; Shiller, 2000; Stambaugh et al., 2012; Yu, 2013; Yu & Yuan, 2011).
Most studies in this area have been conducted in the US market; in Brazil--a market where mispricing may derive from investor behavior--, research is still scarce. Martins, Pereira, Amorim, Oliveira and Oliveira (2010) studied the relation between investor sentiment and firm book-to-market ratios and did not find a significant relation. Yoshinaga and Castro (2012) found a negative and significant relation between the sentiment index and future returns in the Brazilian market. Such evidence--that the investor sentiment index is an important component of asset pricing in Brazil--make way for new questions related to the intensity and way investor sentiment influences returns. In addition, studies that involve the investor sentiment index are recent and no study on market anomalies in Brazil was found in the literature that addresses this aspect.
There is a growing amount of evidence that indicate the existence of market anomalies in Brazil (Leite, Pinto, & Klotzle, 2016; Machado & Medeiros, 2014; Rogers & Securato, 2009; Santos, Fama, & Mussa, 2012; Silva & Machado, 2016); however, studies that address the behavioral approach of these anomalies are still incipient. This scenario aroused our interest to study how investor sentiment relates to stock market anomalies in Brazil. The theoretical model was based on the works of Baker and Wurgler (2006, 2007) for the construction of the index, and the work of Stambaugh, Yu and Yuan (2012) to empirically test the relation between sentiment and anomaly.
All considered, this paper aims to analyze the relation between the investor sentiment index and stock market anomalies in Brazil. To that end, the researchers set out to construct an aggregate investor sentiment index for the Brazilian market, on proxies used by Baker and Wurgler (2006, 2007); examine the relation between the investor sentiment index and the returns of portfolios formed on Long-Short strategies based on value anomalies; analyze the performance of portfolios formed on Long-Short strategies based on value anomalies, comparing periods of high and low investor sentiment; and compare the performance of long positions and short positions for portfolios formed on Long-Short anomaly-based strategies.
Therefore, this research contributes to the literature, mainly in that it analyzes the Brazilian market and the relation between value anomalies and investor sentiment. Another of this study's contributions is to evaluate how pricing deviations caused by optimistic investors are different from those caused by pessimistic investors.
Literature Review and Hypotheses
Fama and French (2008) indicate some return patterns that are not explained by the CAPM, known as market anomalies. Among the major anomalies, studies have found abnormal excess returns of low capitalization stocks (Banz, 1981), high book-to-market stocks (Fama & French, 1992; Rosenberg, Reid, & Lanstein, 1985), and highly profitable stocks (Cohen, Gompers, & Vuolteenaho, 2002; Haugen & Baker, 1996). Jegadeesh and Titman (1993) demonstrated that stocks that produced low return in the previous year tend to achieve low returns in the following months, whereas stocks that produced high returns in the previous months tend to accomplish high returns in the following months. Other studies show an inverse relation between past and following returns (Daniel, Hirshleifer, & Subrahmanyam, 1998; Hong & Stein, 1999). Still, there is evidence of a negative relation between return rate and investment (Fairfield, Whisenant, & Yohn, 2003; Titman, Wei, & Xie, 2004); high accruals and following returns (Sloan, 1996), and; equity issuance and return rate (Daniel & Titman, 2006; Pontiff & Woodgate, 2008).
To Barberis and Thaler (2002), anomalies in documented pricing models cannot be easily explained from the traditional rational perspective and, in this aspect, behavioral economics argues that asset price deviations from fundamental values are caused by investors that are not totally rational (Barberis et al., 1998; Barberis & Thaler, 2002; Delong et al., 1990; Shiller, 2000, 2003). In this context, a number of studies have found empirical evidence that investor sentiment can possibly contain a vast market component capable of driving the prices of several assets at once towards a specific direction (Baker & Wurgler, 2006, 2007; Baker et al., 2012; Brown & Cliff, 2004; Stambaugh et al., 2012; Yu & Yuan, 2011).
The growing literature consolidates a consensus that investor sentiment affects stock prices, thus driving researchers to a new issue, that of seeking the best ways to measure sentiment (Baker & Wurgler, 2007). The simplest, most intuitive and straightforward way is a survey with investors, as in the University of Michigan index and the research conducted by Prof. Robert Shiller at Yale University. In Brazil, the closest there is to this approach is the Consumer Confidence Index (Indice de Confianca do Consumidor [ICC]) of the Sao Paulo State Trade Federation (Federagao do Comercio do Estado de Sao Paulo).
Economists view sentiment measures obtained through surveys with some suspicion, since there is a potential distance between what respondents say and their behavior (Baker & Wurgler, 2007). Another approach uses secondary data of investor transactions as proxies for sentiment. Lee, Shleifer and Thaler (1991) used the closed end-fund discounts (CEFD) as a sentiment measure, as this represents the distortion between the prices considered by investors and fundamental prices. Among the most cited works on sentiment index is that of Baker and Wurgler (2006), who developed a sentiment index constructed on the first principal component of six proxies related to investor behavior. In the Brazilian market, Yoshinaga and Castro (2012) have found evidence that the investor sentiment index is an important component in asset pricing.
Despite the influence of the sentiment index on stock prices, Stambaugh et al. (2012) found evidence that sentiment-related mispricing is asymmetrical, that is, overpricing is greater and more frequent than underpricing. Overpricing in the stock market may occur because of optimistic investors, who act by increasing buy orders, or--when they already own the stocks--by taking no position, thus making sell orders smaller than buy orders. In turn, underpricing has less influence, since pessimistic investors may short sell or, when they already own the stocks, sell them the conventional way. Stambaugh et al. (2012) associated their results with the Miller's argument (1977), which defends that short-sale constraints, such as additional risk, limit this type of operation and, thus, underpricing could be caused only by the increase in conventional sales of pessimistic investors who would be willing to close their long positions, which they normally are not willing to do. This way, distortions in prices caused by optimistic investors are greater than those caused by pessimistic investors.
Finally, in Brazil, there is evidence that short-sale constraints affect prices, thus causing overpricing. Chague, De-Losso, De Genaro and Giovannetti (2014) studied the effect of demand (short-sellers are informed) and supply (short-sellers are restricted) in the stock lending market on share prices and concluded that short sellers are well-informed, thus increasing the demand for equity lending. However, the low supply in the equity lending market prevent prices from reflecting all information available in the market. Corroborating the Miller's hypothesis (1977), there is evidence in the Brazilian market that the high levels of equity lending create constraints that affect stock prices (Bonomo, De Mello, & Mota, 2015; Chague, De-Losso, De Genaro, & Giovannetti, 2014, 2017).
Considering that market anomalies may be comprised of both risk premium components and components related to mispricing caused by irrational expectations, sentiment index may have an important role in explaining part of mispricing, which--to a certain extent--are related to market anomalies. Therefore, based on recent empirical evidence (Stambaugh et al., 2012), this study sets the following research hypothesis:
[H.sub.1]: In the Brazilian stock market, it is possible to relate investor sentiment to portfolio returns, according to Long-Short anomaly-based strategies.
Given the evidences that price distortions due to pessimistic investors are smaller than those caused by optimistic investors (Miller, 1977; Stambaugh et al., 2012), this study also intends to test the following hypotheses:
[H.sub.2]: Value anomalies in the Brazilian stock market are greater after...
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