Individual Investor Sentiment and Stock Returns: Evidence from the Korean Stock Market

Abstract

We investigate the dynamic relationship between individual investor sentiment and stock returns in the Korean stock market. The evidence indicates that individual investor sentiment has no significant explanatory power for cross-sectional stock returns. However, individual investors’ trades can move stock prices in certain stocks by their contrarian behavior, which leads them to implicitly provide liquidity to other market participants. In addition, individual investors earn a small market-adjusted excess return in the short-horizon future as compensation for liquidity provision. Our findings show that short-horizon return predictability of individual investors does not come from their private information.

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