RELATIONSHIP BETWEEN INVESTOR SENTIMENT AND STOCK RETURNS: AN ANALYSIS OF THE BRAZILIAN MARKET
DOI:
https://doi.org/10.22561/cvr.v37i1.9038Keywords:
Investor Sentiment, Social Media, Brazilian Stock MarketAbstract
The growing influence of social media in society intensifies the debate on the role of investor sentiment in investment decisions. We investigated the influence of investor sentiment captured from social media on stock returns in the Brazilian stock market, using stock-level individualized data. To this end, we applied the Granger Causality Test to examine the predictive capacity between the variables analyzed and assessed the explanatory relevance of incorporating investor sentiment into the Capital Asset Pricing Model (CAPM). We provide evidence that the history of stock returns influences investor sentiment in the Brazilian market, regardless of the individual characteristics of the stocks, but we do not provide evidence of movement in the opposite direction. In addition, we conclude that individualized investor sentiment has limited potential to improve the performance of the CAPM and, in general, does not add value to stock pricing modeling. The pattern of delayed sentiment reaction to returns implies, as a practical recommendation, the need for caution by market analysts and investors when incorporating sentiment variables derived from Twitter into their decision-making models. Finally, we reinforce that the evolution of these latent variables requires continuous debate, given the complexity of their nature, and we highlight the importance of future investigations, with epistemological flexibility, that examine how decisions influenced by cognitive biases affect asset performance.
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