Investor confidence

Abstract

The performance of stock in any economy s stock markets can be attributed the underlying fundamentals of the firm or the economy and the mood or underlying sentiment of the investor community. Investor confidence movements impacts firms in their capital raising, dividend disbursement and other key decisions. It is tough to measure investor confidence level on a standalone basis. But one can measure the sentiment level by studying some proxy variables like put-call ratio, implied volatility, dividend premium etc. This paper describes salient characteristics of such proxy measures and why they are treated as measures for investor sentiment. In recent years researchers have studied the non-linear behavior in the stock returns. This contradicts the random walk assumption for stock returns for some time intervals. Studies have found statistically significant relationship between the degree of non-linearity and the put-call ratio which prove the prevalence of investor sentiment in determining the stock returns. In our analysis of investor confidence in Indian market scenario, we have found statistically significant relation between stock returns and daily put-call ratio, and daily stock returns and implied volatility. The results indicate the investor sentiment plays a big role in Indian stock market. More specifically the results show the investor feels mean reversion in stock price. Whenever returns are positive, the put-call ratio shoots up indicating negative sentiment in the market that the price will come back down and it is other way round when returns are negative. Though results are statically significant but much more rigorous analysis is required which can test other dependence, before coming to any conclusion.