Investor Sentiment, Market Competition, and Financial Crisis: Evidence from the Korean Stock Market

ABSTRACT

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.

KEY WORDS:

• global financial crisis
• investor sentiment
• Korean market
• product market competition
• stock return

JEL:

• G12
• G14
• L16

Notes

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 2008; Kim and Ryu 2015a; Ryu 2015; Ryu and Yang 2018, 2019; Yang et al. 2017; Yang, Choi, and Ryu 2017).

2. For details on the characteristics of Korea’s financial market, refer to the recent studies of Chung, Cho, and Ryu (2019), Chung, Park, and Ryu (2016), Han, Kutan, and Ryu (2015), Kim and Ryu (2015b), Lee and Ryu (2014), Park, Kutan, and Ryu (2019), and Ryu (2011).

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 (2013) and Lins, Servaes, and Tamayo (2017).

4. In Table 1, 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.

Additional information

Funding

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].