I-2-3\ Investor sentiment and Behavioral approach:
The list of proxies used by researchers to value investor
sentiment and to study its impact on underpricing anomaly is very long. The
most important proxies often used in researches and empirical studies are: grey
market prices, market conditions, demand submitted by individual investors,
discounts on closed-end funds and market-to-book ratio. Researches and
empirical works report that the higher is the investor sentiment and his
optimism, the higher is the level of underpricing.
In this study, I use the investors' sentiment index:
Ø The first measure is obtained from the survey data of
the American Association of Individual Investor (AAII): In July 1987,
AAII started conducting a weekly sentiment survey asking for the likely
direction of the stock market during the next six months (up, down or the
same). The participants are randomly chosen from approximately 100,000 AAII
members, only subscribers to AAII are eligible to vote and they can only vote
once during the survey period.
Each week, AAII mails the questionnaires, and members fill
them out and return them via US mail. Each week AAII collects responses from
Friday to the following Thursday, compiles the results based on survey answers
and labels them as bullish, bearish or neutral and reports the results on
Thursday or Friday. Since this survey is targeted towards individual investors,
it is primarily a measure of individual investors' sentiment.
Ø The second measure is obtained from the survey data
of Investors Intelligence (II), an investment service based in
Larchmont, New York. II compiles its sentiment data weekly by categorizing
approximately 150 market newsletters since 1964. Data is based on a survey of
investment advisory newsletters. To overcome the potential bias problem towards
buy recommendations, letters from brokerage houses are excluded. Newsletters
are read and marked starting on Friday each week. The results are reported as
percent bullish, bearish, or neutral on the following Wednesday. Since authors
of these newsletters are current or past market professionals, the II series is
interpreted as a measure for institutional investors' sentiment.
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