| Summary: | 碩士 === 國立中央大學 === 財務金融學系 === 106 === This study explores how investor sentiment affects the individual stock return in Taiwan. We use monthly data for the stocks listed on the Taiwan stock exchange (TSE) from March 1996 to December 2017. First, an investor sentiment index is the first principal component of three different investor sentiment proxies: the market turnover, margin buying/short selling ratio and dividend premium. Each of them is orthogonalized to the macroeconomic indicators to purge the index of sentiment that reflects business cycle conditions. Second, we regress individual stock return on prior investor sentiment. The result reveal that prior investor sentiment has negative effect on individual stock return. Plus, we take subprime mortgage crisis into consideration to examine if there are the different results. Our findings uncover that the impact of investor sentiment does not reinforce during the subprime mortgage crisis. Third, we examine how the changes in sentiment affects the subsequent individual stock return. The result reveal that the predictive power for return is insignificant. Then, we interact the investor sentiment index with the change in sentiment and investigate the impact of interaction terms on subsequent individual stock return. The evidence show that there is the explanatory power of interaction terms on return. Finally, we classify the sample with different firm characteristics and examine whether the sentiment sensitivity varies with firm characteristics. We find that dividend-paying stocks and high volatility stocks are more sensitive to sentiment.
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