Market Regimes, Investor Sentiment And Stock Classification=Excess Return

There are a number of papers studying on factors that affect stock returns. For forty years, the researchers have tested all of macroeconomic and firm specific factors theoretically and empirically in developed and developing markets. But the results are inconsistent with theories and models based on these theories. For this reason, there have been new concepts to explain stock returns as investor sentiment. Previously, these concepts are used explaining anomalies of efficient market hypothesis. But it has seemed that these concepts explain not only anomalies but also market regimes. In this paper, I investigate whether three factors (market regimes, stock classification and investor sentiment) explain stock’s excess return or not. I classify stocks via market based indicators; Book to Market (B/M) ratio and Return on Equity (ROE), and I suggest that market has two regimes and determine these regimes using Markov Process. Finally, I test my hypothesis that different stock classification and being in different market regimes effect on investor sentiment which is thought to determine stock excess return? I find that all of factors in this paper determine sock excess return strongly.

Anahtar Kelimeler: investor sentiment, Markov regimes, growth and value stock, MS-GARCH model, stock classification

There are a number of papers studying on factors that affect stock returns. For forty years, the researchers have tested all of macroeconomic and firm specific factors theoretically and empirically in developed and developing markets. But the results are inconsistent with theories and models based on these theories. For this reason, there have been new concepts to explain stock returns as investor sentiment. Previously, these concepts are used explaining anomalies of efficient market hypothesis. But it has seemed that these concepts explain not only anomalies but also market regimes. In this paper, I investigate whether three factors (market regimes, stock classification and investor sentiment) explain stock’s excess return or not. I classify stocks via market based indicators; Book to Market (B/M) ratio and Return on Equity (ROE), and I suggest that market has two regimes and determine these regimes using Markov Process. Finally, I test my hypothesis that different stock classification and being in different market regimes effect on investor sentiment which is thought to determine stock excess return? I find that all of factors in this paper determine sock excess return strongly.

Keywords: investor sentiment, Markov regimes, growth and value stock, MS-GARCH model, stock classification