The Impact of Investor Sentiment on Stock Prices in The Developed and Developing Countries

Abstract

The study of causal relationship of investor sentiment on stock prices has got more and more attention. This paper examines the impact of investor sentiment on investment behavior and thus on stock prices in four different countries including two developed countries (United States and United Kingdom), and two developing countries (China and India). Due to different levels of development, different countries have different measures of consumer sentiment. Therefore, the author enumerates in detail the measures of sentiment index for each studied country. By comparing representatives of investor indices, the index accuracy was analyzed as a function of market spacing. In addition, the differences between the conclusions of developing countries and developed countries are also compared. Meanwhile, the mutual influence of investor sentiment was summarized among developed countries. The empirical findings show that the study about exploring the causal relationship of the investor sentiment on the stock prices plays an important role in formulating detailed investor strategies. In other words, investors who are familiar with the impact of emotions on stock prices can be more successful in stock investing and their investment risk can be reduced than those who are not.