This study examines the role of product market competition in explaining the relationship between investor sentiment and stock returns. We also consider how financial crises, which are exogenous shocks to market participants, affect the associations and interactions among the market competition, investor sentiment, and stock market returns. Our empirical analyses indicate that the positive relationship between sentiment and returns found under high market competition disappears under low market competition. In the crisis period, however, we observe significant relationships between sentiment and returns irrespective of the degree of market competition.
1. A substantial portion of emerging market trading is explained by the trades of individual investors. Most of the individual investors in emerging markets (e.g., the Korean market) are regarded as conducting noisy and uniformed trades and as being affected by sentiment and behavioral biases (Ahn, Kang, and Ryu Citation2008; Kim and Ryu Citation2015a; Ryu Citation2015; Ryu and Yang Citation2018, Citation2019; Yang et al. Citation2017; Yang, Choi, and Ryu Citation2017).
3. Studies use various dates to define the 2008 global financial crisis. We consider the crisis period to be from August 15, 2008 to March 15, 2009, following Lins, Volpin, and Wagner (Citation2013) and Lins, Servaes, and Tamayo (Citation2017).
4. In , we multiply the ATR by 100. The mean value of SENTIMENT is scaled to zero because the sentiment values are estimated from the residuals in equation (2).
5. The estimated Sentiment t-value in the Medium HHI group is somewhat greater than that in the Low HHI subgroup, which might suggest that the possible non-linear relationship between the market competition condition and sentiment is not monotonic.
6. We are grateful for the constructive comments of an anonymous referee regarding this issue.
Ahn, H. J., J. Kang, and D. Ryu. 2008. Informed trading in the index option market: The case of KOSPI 200 options. Journal of Futures Markets28 (12):1118–46. doi:10.1002/fut.v28:12.
Kim, J. S., and D. Ryu. 2015a. Effect of the subprime mortgage crisis on a leading emerging market. Investment Analysts Journal44 (1):20–42. doi:10.1080/10293523.2015.994442.
Ryu, D. 2015. The information content of trades: An analysis of KOSPI 200 index derivatives. Journal of Futures Markets35 (3):201–21. doi:10.1002/fut.v35.3.
Ryu, D., and H. Yang. 2019. Who has volatility information in the index options market?. Finance Research Letters 30:266–270. doi:10.1016/j.frl.2018.10.008.
Yang, H., H.-J. Ahn, M. H. Kim, and D. Ryu. 2017. Information asymmetry and investor trading behavior around bond rating change announcements. Emerging Markets Review32:38–51. doi:10.1016/j.ememar.2017.05.004.
Chung, C. Y., S. J. Cho, D. Ryu, and D. Ryu. 2019. Institutional blockholders and corporate social responsibility. Asian Business & Management18 (3):143–86. doi:10.1057/s41291-018-00056-w.
Chung, K. H., S. G. Park, and D. Ryu. 2016. Trade duration, informed trading, and option moneyness. International Review of Economics and Finance44:395–411. doi:10.1016/j.iref.2016.02.003.
Han, H., A. M. Kutan, and D. Ryu. 2015. Effects of the US stock market return and volatility on the VKOSPI. Economics: The Open-Access, Open-Assessment E-Journal 9 (2015–35):1–34.
Kim, J. S., and D. Ryu. 2015b. Return and volatility spillovers and cojump behavior between the U.S. and Korean stock markets. Emerging Markets Finance and Trade51 (S1):S3–S17. doi:10.1080/1540496X.2014.998881.
Lee, J., and D. Ryu. 2014. Regime-dependent relationships between the implied volatility index and stock market index. Emerging Markets Finance and Trade 50 (5):5–17.
Park, Y. J., A. M. Kutan, and D. Ryu. 2019. The impacts of overseas market shocks on the CDS-option basis. North American Journal of Economics and Finance47:622–36. doi:10.1016/j.najef.2018.07.003.
Ryu, D. 2011. Intraday price formation and bid-ask spread components: A new approach using a cross-market model. Journal of Futures Markets31 (12):1142–69. doi:10.1002/fut.v31.12.
Lins, K. V., P. Volpin, and H. F. Wagner. 2013. Does family control matter? International evidence from the 2008–2009 financial crisis. Review of Financial Studies26 (10):2583–619. doi:10.1093/rfs/hht044.
Lins, K. V., H. Servaes, and A. Tamayo. 2017. Social capital, trust, and firm performance: The value of corporate social responsibility during the financial crisis. Journal of Finance72 (4):1785–824. doi:10.1111/jofi.12505.
This work was supported by the National Research Foundation of Korea (NRF) grant funded by the Korea government (MSIT; Ministry of Science and ICT) [No. 2019R1G1A1100196].