Empirical measures of symmetry of market sentiments

Abstract

The analysis of asset return series of equity prices and stock indices is a well-researched problem tackled by economists, business and financial analysts in the last few decades. It has captured the fancy of financial economists, global and local portfolio investment consultants, foreign investment institutions and the trading man in the street. In this paper a strong case is made to follow a new approach for any investor to foray into an unknown stock market. This approach is the market sentiment approach. We introduce the concept of market sentiments, their definitions and different constructs one may propose vis-a-vis asset return series. We formulate several concepts of symmetry of market sentiments and propose empirical measures to validate such types of symmetric market sentiments. The efficacies of these measures are evaluated using extensive simulation studies and the efficient measures are identified. As an application, we explore the nature of absolute market sentiments that prevailed in weekly mean asset returns of two domestic companies registered in Botswana Stock Exchange during the trading period: 4 January 2016 to 30 December 2016. Our analysis indicates that both companies are characterised by the presence of complete symmetric absolute market sentiments.

Keywords:

• asset return series
• classification rules
• equity prices
• empirical measures
• market sentiments
• concept of symmetry

JEL classifications:

• C 19
• G13
• G 14

Public Interest Statement

Many financial data analyses are focused on prediction of the future prices of security and as such are model based strategies. It is believed that security prices exhibit considerable variations from time to time and these variations can be captured by well-defined market volatility phenomena. Researchers in financial data analysis followed the classical approach when dealing with stock return volatility from an investor’s perceptive. However, the existing approaches and analyses are a natural follow-up once the investor has entered the market and these approaches are relevant to an investor “post-market-entry”. The questions of substantive interest are “What drive a prospective investor into a market?” “What should be the guiding principles that help a prospective investor to enter into a market?” This paper attempts to address these questions by introducing the concept of “market sentiments” and advance some formulations and theories vis-à-vis the new concept. We formulate several concepts of symmetry of market sentiments and corresponding empirical measures. The efficacies of these measures are evaluated using extensive simulation studies.

Additional information

Notes on contributors

K.K. Moseki

Mr K.K. Moseki is a lecturer in the Department of Statistics, University of Botswana. He is pursuing his PhD degree in Statistics at the same department. He has published research papers in regional and international journals. His research interests include financial data analysis, time series, among others.

K.S. M. Rao

Prof K.S. M. Rao is a Professor in the Department of Statistics, University of Botswana. He has published extensively in national, regional and international peer reviewed journals with high impact factors. His research areas include parametric and nonparametric inference, empirical likelihood, mathematical finance and data analysis related to research areas in atmospheric, biological and social sciences.