Sentiment

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the prices of A-shares, mostly held by domestic organizations or individuals, traded on the Shanghai stock exchange were more than twice as likely to end in 8, than 4.

Similarly, for A-shares traded on the Shenzhen stock exchange a preference for 8 was found. The preference for 8 was much weaker for B-shares, which are largely held by foreigners. Hirshleifer, Jian, and Zhang (2014) test newly listed firms in China from 1991 through 2013 and document that firms in China going public have an abnormally high proportion of lucky listing codes and an abnormally low proportion of firms with unlucky listing codes, and that lucky listing codes are associated with lower post-IPO abnormal stock returns. Bhattacha, Kuo, Lin and Zhao (2014) point out that, on the Taiwan Futures Exchange, individual investors submit disproportionately more limit order’s price at “8” than at “4”. Chung, Darrat and Li (2014) examine the potential effect of superstitious beliefs on stock trading in four Asian- Pacific countries with deep Chinese cultural heritage (China, Hong Kong, Singapore, and Taiwan) by using daily data over 2 January 1991 to 30 December 2011 and suggest that unlucky days, particularly day 4 and Friday the 13^th, generally exhibit higher stock returns.

2.3 Sentiment

Sentiment and moods have already been proved to affect investors’ financial decisions, which are irrational. Further, individual investors are more likely to deviate from rational valuation of securities than institutional investors (Cohen, Gompers, and Vuolteenho (2001)). Behavioral economic studies reveal that negative sentiment driven by bad mood and anxiety affects investment decisions and may hence affect asset pricing. Sentiment can be definite by many factors, including weather, holidays, season, sports or disasters, besides, the superstitions come from culture can also be a reason.

Numerous studies in psychology demonstrate that those factors above mentioned

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have a significant effect on human behavior and moods. Saunders (1993) uses daily returns on the Dow Jones Industrial Average over 1927-1989, and daily returns on value and equal-weighted market indices over 1962-1989. As a proxy for weather conditions, Saunders uses the “percentage of cloud cover from sunrise to sunset” according to the New York weather station closest to Wall Street. He suggests that stock returns are significantly lower on cloudy days than on sunny days. Hirshleifer and Shumway (2003) examines main stock exchanges across 26 countries, investigating the relationship between morning sunshine in the city of stock exchanges and daily market index returns from 1982 to 1997. The result suggests that sunshine is strongly significantly correlated with stock returns. Their work appears to be a direct evidence to date that stock prices are not rational reflections of value, but are instead influenced by investors’ emotional states. Goetzmann and Zhu (2005) use trading record from 1991 to 1996 and find that, while cloud cover does not affect the propensity of investors to buy or sell, whereas it seems to be associated with wider bid-ask spreads. They conjecture that mood swings by individual specialists may account for this observation. They find that when changes in spreads are incorporated in regressions of returns on weather, the weather effect is greatly reduced.

Kaplanski and Levy (2010) examine the effect of aviation disasters on stock prices.

They find evidence of a significant negative event effect with an average market loss of more than $60 billion per aviation disaster, while the estimated actual loss is no more than $1 billion. And a price reversal occurs subsequently within two days. They find the effect to be greater in small and riskier stocks and in firms in less stable industries.

This event effect is also accompanied by an increase in the perceived risk: implied volatility increases after aviation disasters without an increase in actual volatility.

Edmans, García and Norli (2007) use international soccer results from January 1973

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through December 2004 as a variable of sentiment since the comparison of TV viewing figures, media coverage, and merchandise sales suggest that soccer is particular a

“national interest” in many countries in their samples. They find a significant market decline after soccer losses. For instance, a loss in the World Cup elimination stage leads to a next-day abnormal stock return of -49 basis points. This loss effect is stronger in small stocks and in more important games. They also document other types of sports including international cricket, rugby, and basketball, and show a loss effect after competitions.

Some specific days also tend to have influence on people’s mood. Ni, Wang and Xue (2015) examine Chinese stock market and suggest that the influence of investor sentiment is significant from 1 month to 24 months, while the effect is asymmetric and reversal. That is to say, it is positive and large for stocks with high returns in the short term while negative and small in the long term. This reversal effect verifies the existence of a strong overreaction in the Chinese stock market. They also find that Chinese investors have notable cognitive bias and speculation tendency. Areni (2008) point out that individuals forecast low mood at the beginning of the work week (i.e., blue Monday) and high mood toward the weekend given the “Thank God it's Friday”

or “TGIF” mentality. Positive moods are brought up during weekends when social interactions can be fully satisfied for those who experience gloomy moods due to constraints in self-interest activities and entertainment during the work week (Ryan et al., 2010).

With positive mood, holidays exhibit buy-side sentiments amid individual and institutional investors despite the weekday trading activities (Chui and Wei, 1998; Al-Khazali, 2014). Investors may take part in important buying activities during pre- and post-holiday periods, leading to greater pre-holiday stock returns than non-pre-holiday

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stock returns (Chui and Wei, 1998; Teng and Liu, 2013). Hence, investor sentiments originated from seasonal anomalies have significant influence on stock returns (Baker et al., 2012; Yuan and Gupta, 2014; Yang, 2016). Investors tend to have different trading habits or preferences based on their calendar- or time-dependency. Yang (2016) analyze the influence of the Chinese lunar calendar and superstitions on holiday preferences using theories on time and mood to designate investor sentiment. Trading interruptions caused by Thursday holidays negative significantly influence investor sentiment for trust companies and individual investors. Trading detachment resulted from cultural holidays in June positive significantly influences investor sentiment for dealers and individual investors. Besides, trust companies and the market present significantly positive sentiments toward winter holidays. The stock exchange shows both negative and positive sentiments toward winter holidays on holidays in January. Culture-based holidays and superstition in Taiwan can be a strong evidence for holiday preferences in Asia.

Baker and Wurgler (2006) link sentiment with firm characteristics and show that when investor sentiment is low, subsequent returns are much higher for low capitalized, smaller, young, highly volatile, unprofitable, non-dividend-paying, speculative firms with extreme growth potential or distressed stocks. When sentiment is high, such categories of stock earn relatively low subsequent returns. On the contrary, “bond-like”

and safer stocks are less driven by sentiment. The value of a firm with a long earnings history, tangible assets, and stable dividends is much less sensitive, and thus its stock is likely to be less affected by fluctuations in the propensity to speculate.