Project title: The nexus between investor sentiment and equity market dynamics. A new sentiment indicator approach.

Financing institution: UEFISCDI (Executive Unit for Financing Higher Education, Research, Development and Innovation) / Ministry of Education and Scientific Research

Project code: PN-III-P1-1.1-TE-2019-1702

At the moment, the approaches of investor sentiment in the literature are limited to either regressing financial variables based on the principal component analysis or to using semantic web techniques which are meant to capture immediate reactions based on news data. Our key contribution is the construction of an aggregated sentiment indicator based on relevant financial variables, cultural and behavioral factors, and qualitative information extracted from media articles and internet messages. This preliminary investigation will be followed by an extensive research focused on the nexus between the sentiment indicator and the dynamics of European equity markets. In the light of the devastating effects of market crashes and excessive volatility, any topic that addresses irrationality, potentially amplified by the manifestation of contagion between markets, represents a priority research. Under such circumstances, investigating investor sentiment and its impact on the dynamics of equity markets offers valuable information for the policy makers responsible for monitoring the efficiency with which capital is allocated through the stock markets. Moreover, it is important that market regulators understand the network patterns of the European equity markets ensuring that episodes of extreme investor sentiment do not cause price explosions threatening the market stability. In addition, for taking advantage from international diversification, investors need to be aware of how international equity markets are correlated and how similar sentiments influence these correlations.

The foreseen contribution of our research proposal is twofold:

1. Designing an aggregated sentiment indicator at country level.
2. Exploring the relationship between investor sentiment and equity market dynamics in Europe.

Research Team:

Maria-Miruna Pochea
Project Leader
Babeș-Bolyai University of Cluj-Napoca, Romania
miruna.pochea@ubbcluj.ro

Angela-Maria Filip
Senior Researcher
Babeș-Bolyai University of Cluj-Napoca, Romania
angela.filip@ubbcluj.ro

Cristian-Marius Litan
Senior Researcher
Babeș-Bolyai University of Cluj-Napoca, Romania
cristian.litan @ubbcluj.ro

Mihai Nițoi
Senior Researcher
Institute for World Economy, Romanian Academy, Romania
mihai.nitoi@iem.ro

Daniela Catan
Junior Researcher
Bucharest University of Economic Studies, Romania
chilaridana@gmail.com

Cristina Negru
Junior Researcher
Babeș-Bolyai University of Cluj-Napoca, Romania
cristina.negru@ubbcluj.ro

Expected Results

The outputs of our research proposal are the following:

2020:

• 2 working papers in extenso with a critical literature review.
• the activity report for 2020.
• the web page of the project.

2021:

• 2 papers submitted for publication in BDI indexed journals.
• 1 paper submitted for publication in an ISI indexed journal.
• participation in scientific events in the field (conferences, research internships, courses, summer schools, workshops).
• activity report for 2021.

2022:

• 1 paper submitted for publication in a BDI indexed journal.
• 2 papers submitted for publication in ISI indexed journals.
• organizing a workshop on behavioral finance topics, capital markets, the use of artificial intelligence in finance.
• participation in scientific events in the field (conferences, research internships, courses, summer schools, workshops).
• activity report for 2022.

Activity Reports

Results 2020:

• 2 papers submitted for publication to ISI indexed journals:

1. Extreme market sentiments and herding behavior, Angela-Maria FILIP, Maria Miruna POCHEA, Andreea Maria PECE, submitted to Journal of Behavioral and Experimental Economics;
2. Towards the direct measurement of risk premium implied by myopic loss aversion, Angela-Maria FILIP, Balint Zsolt NAGY, submitted to Applied Economics Letters.

• 3 working papers in extenso:

1. What the central banks are saying: A sentiment-index database Mihai NIȚOI, Maria Miruna POCHEA;
2. International portfolio allocation in a cultural perspective, Cristina NEGRU, Alexandru TODEA;
3. Impact of investors’ sentiments on ESG performance, Daniela CATAN.

• the activity report for 2020 - Romanian version
• the activity report for 2020 - English version
• the web page of the project

2021:

Articles in journals indexed in Web of Science (accepted for publication in 2021)

The nexus between bank connectedness and investors’ sentiment (Mihai NIȚOI, Maria Miruna POCHEA) Finance Research Letters, Available online 11 September 2021, 102432, link: https://www.sciencedirect.com/science/article/abs/pii/S1544612321004219.

Articles in journals indexed in international databases (published in 2021)

International portfolio diversification and genetic relatedness (Cristina HARIN), Review of Economic Studies and Research Virgil Madgearu, Vol. 14 (2), pp.15-44, doi: 10.24193/RVM.2021.14.78, link: https://econ.ubbcluj.ro/rvm/numere/14/RVM,%202021,%2014(2),%20final,%20site,%20Harin.pdf

The nexus between hedge fund size and risk-adjusted performance (Daniela CATAN), Studia Universitatis Babes-Bolyai Oeconomica, Vol. 66 (3), pp. 40-56, doi: 10.2478/subboec-2021-0013, link: http://studia.ubbcluj.ro/arhiva/abstract_en.php?editie=OECONOMICA&nr=3&an=2021&id_art=19060

Articles under review in journals indexed in Web of Science

The influence of cultural norms on international equity allocation (Cristina HARIN, Alexandru TODEA), submitted to Journal of Banking and Finance.

What drives trend-following profits in stocks? The role of the trading signals’ volatility (Adrian ZOICAȘ-IENCIU, Maria Miruna POCHEA), submitted to Applied Economics.

Towards the direct measurement of risk premium implied by myopic loss aversion (Angela Maria FILIP, Balint Zsolt NAGY), submitted to Applied Economics Letters.

Analysis of a conjecture concerning the equality of the AHP priority vector and the geometric row mean, when the former minimizes its inconsistency measure (Theo K. DIJKSTRA, Cristian Marius LITAN, Francisco MARHUENDA, Mircea RUS), submitted to Nonlinear Analysis: Real World Applications.

Articles under review in journals indexed international databases

The nexus between hedge fund size and risk-adjusted performance (Daniela CATAN), submitted to Studia Universitatis Babes-Bolyai Oeconomica.

Herding behavior under extreme market sentiments: industry-level evidence in European Emerging Markets (Angela Maria FILIP, Andreea Maria PECE), submitted to Journal of Emerging Market Finance.

Working papers in extenso

What the central banks are saying: A sentiment-index database (Mihai NIȚOI, Maria Miruna POCHEA).

Investors’ sentiment and the risk-adjusted performance of US hedge funds (Daniela CATAN, Angela Maria FILIP, Bogdan NEGREA).

Investors’ sentiment, weather conditions and stock returns (Angela Maria FILIP, Andreea Maria PECE).

Participation to international conferences in the country and abroad

Impact of cultural norms on foreign bias (authors: Cristina HARIN, Alexandru TODEA), FIBA 2021, 27-29 May 2021, Bucharest, Romania.
Participant: Cristina HARIN

Cultural norms influence on international asset allocation (authors: Cristina HARIN, Alexandru TODEA), ERMAS 2021, 28-30 July 2021, Sibiu, Romania.
Participant: Cristina HARIN

Extreme market sentiments and herding behavior (authors: Angela Maria FILIP, Maria Miruna POCHEA, Andreea Maria PECE), 23rd INFER Annual Conference, 08-10 September 2021, Lisbon, Portugal.
Participants: Angela Maria FILIP, Maria Miruna POCHEA

Bank connectedness and investors’ sentiment (authors: Maria Miruna POCHEA, Mihai NIȚOI), 6th Vietnam Symposium in Banking and Finance, 28-30 October, Vietnam.
Participant: Mihai NIȚOI

Extreme market sentiments and herding behavior (authors: Angela Maria FILIP, Maria Miruna POCHEA, Andreea Maria PECE), 8th International Conference on Opportunities and Challenges in Management, Economics, and Accounting, 19-21 November 2021, Paris, France.
Participants: Angela Maria FILIP, Maria Miruna POCHEA

Work visiting periods

11-17 October 2021, visiting period at University Carlos III de Madrid, Department of Economics, Madrid, Spain.
Participants: Angela Maria FILIP, Maria Miruna POCHEA

28 November-1 December 2021, visiting period at University Carlos III de Madrid, Department of Economics, Madrid, Spain.
Participant: Cristian Marius LITAN

The activity report for 2021 - Romanian version
The activity report for 2021 - English version

Results 2022:

Articles in journals indexed in Web of Science (published in 2022)

The nexus between bank connectedness and investors’ sentiment (Mihai NIȚOI, Maria Miruna POCHEA) Finance Research Letters, Vol. 44, 102432, link: https://doi.org/10.1016/j.frl.2021.102432.

Measuring the myopic loss aversion premium: an experimental approach (Angela Maria FILIP, Balint Zsolt NAGY), Applied Economics Letters, link: https://www.tandfonline.com/doi/abs/10.1080/13504851.2022.2097166?journalCode=rael20.

Articles in journals indexed in Web of Science (accepted for publication in 2022)

What drives trend-following profits in stocks? The role of the trading signals’ volatility (Adrian ZOICAȘ-IENCIU, Maria Miruna POCHEA), Applied Economics, Forthcoming.

Articles under review in journals indexed in Web of Science

Intentional and spurious herding behavior: a sentiment driven analysis (Maria Miruna POCHEA), submitted to Journal of Behavioral and Experimental Finance.

Unveiling the sentiment behind central bank narratives: A novel deep learning index (Mihai NIȚOI, Maria Miruna POCHEA, Stefan-Constantin RADU), submitted to Journal of Behavioral and Experimental Finance.

The influence of cultural norms on international equity allocation (Alexandru TODEA, Cristina HARIN), submitted to The European Journal of Finance.

Investors’ sentiment, weather conditions and stock returns (Angela Maria FILIP, Andreea Maria PECE) submitted to Journal of Behavioral Finance.

Articles under review in journals indexed international databases

Extreme market sentiments and herding behavior (Angela Maria FILIP, Maria Miruna POCHEA, Andreea Maria PECE), submitted to Journal of Economics and Finance.

Working papers in extenso

Investors’ sentiment and the risk-adjusted performance of US hedge funds (Daniela CATAN, Angela Maria FILIP, Bogdan NEGREA).

The impact of investors’ sentiment on stock returns (Maria Miruna POCHEA, Diana Alexandra LUCA).

Herding behavior, unconventional events, and non-standard monetary policy decisions (Maria Miruna POCHEA).

Analysis of a conjecture concerning the equality of the AHP priority vector and the geometric row mean, when the former minimizes its inconsistency measure (Theo K. DIJKSTRA, Cristian Marius LITAN, Francisco MARHUENDA, Mircea RUS).

Participation to international conferences in the country and abroad

The influence of cultural norms on international equity allocation (authors: Cristina HARIN, Alexandru TODEA), The 5th International Conference on Management, Economics, and Finance (ICMEF), 8-10 July 2022, Zurich, Switzerland.
Participant: Cristina HARIN

Investors’ behavior and market sentiment (authors: Angela Maria FILIP, Maria Miruna POCHEA, Andreea Maria PECE), 5th International Academic Conference on Management and Economics, 22-24 July 2022, Copenhagen, Denmark.
Participants: Angela Maria FILIP, Maria Miruna POCHEA

Extreme market sentiments and herding behavior (authors: Angela Maria FILIP, Maria Miruna POCHEA, Andreea Maria PECE), International Conference on Social Science and Economics, 3-4 September 2022, Munich, Germany.
Participants: Angela Maria FILIP, Maria Miruna POCHEA

Unveiling the sentiment behind central bank narratives: A novel deep learning index (authors: Mihai NIȚOI, Maria Miruna POCHEA, Ștefan-Constantin RADU), 7th Vietnam Symposium in Banking and Finance, 27-29 October 2022, Hanoi, Vietnam.
Participant: Maria Miruna POCHEA

Workshop entitled “The nexus between investor sentiment and equity market dynamics. A new sentiment indicator approach”, details here.

The final activity report – Romanian version
The final activity report – English version