INSTITUTIONAL INVESTOR SENTIMENT

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1 9. INSTITUTIONAL INVESTOR SENTIMENT AND MARET RETURNS: EVIDENCE FROM THE TAIWAN FUTURES MARET Absrac Ralph Yang-Cheng LU 2 Hsiu-Chuan LEE 3 Peer CHIU 4 This sudy explores he dynamic relaionship beween he senimen of insiuional invesors and marke reurns in he fuures marke. Using daa from he Taiwan fuures marke, he empirical resuls show ha he dynamic relaionship beween he senimen of foreign insiuional invesors and he fuures reurns is much sronger han ha of he senimen of domesic insiuional invesors and he fuures reurns. Our empirical resuls also display ha he senimen of foreign insiuional invesors Granger-causes he senimen of domesic insiuional invesors, bu no vice versa. Finally, he senimen of foreign insiuional invesors has a larger effec on subsequen marke reurns and marke saes han ha of he senimen of domesic insiuional invesors. Overall, our empirical resuls sugges ha he relaionship among he insiuional invesor senimen, marke reurns, as well as marke condiions in he Taiwan fuures marke is dominaed by he senimen of foreign insiuional invesors. eywords: Insiuional Invesor Senimen; Foreign Invesors; Domesic Invesors; Fuures Reurns; Marke Saes. JEL Classificaion: G2, G4. INTRODUCTION This paper invesigaes he dynamic relaionship beween he senimen of insiuional invesors and marke reurns in he fuures marke. A large volume of previous This sudy was suppored by a gran from he Naional Science Council (Gran number: MOST H-30-00). 2 Deparmen of Finance a Ming-Chuan Universiy, Taipei, Taiwan (ROC). ralphyclu@gmail.com. Lee 3 Deparmen of Finance a Ming-Chuan Universiy, Taipei, Taiwan (ROC). Corresponding auhor. hclee@mail.mcu.edu.w. 4 Taiwan Fuures Exchange, Taipei, Taiwan. peperc@aifex.com.w. 40 Romanian Journal of Economic Forecasing XVII (4) 204

2 Insiuional Invesor Senimen and Marke Reurns research has focused on he very imporan issue of he relaionship beween invesor senimen and asse reurns. Previous sudies have presened ha he invesor senimen of he sock marke has a significanly negaive effec on subsequen sock reurns (Baker & Wurgler, 2006; Chung, Hung, & Yeh, 202; Baker, Wurgler, & Yuan, 202). On he oher hand, he impac of he invesor senimen of he fuures marke on subsequen marke reurns has received much aenion in he lieraure. Using daa from Commodiy Fuures Trading Commission (CFTC), Wang (200) and Brown and Cliff (2004) use he rading aciviy of he fuures marke o calculae invesor senimen, and hen examine he impac of he invesor senimen of he fuures marke on subsequen marke reurns. Han (2008) also employs he daa from he CFTC o consruc he invesor senimen of he fuures marke, and analyzes he how he senimen of he fuures marke affecs opion prices. Previous sudies have used he invesor senimen of derivaives markes as he proxies of he insiuional invesor senimen (see Brown & Cliff, 2004; Han, 2008). However, due o daa limiaions, no work can measure he insiuional invesor senimen in a fuures marke direcly, and herefore, no work has been done on he dynamic relaionship beween he insiuional invesor senimen by various ypes of he fuures invesors and he fuures reurns. On July 2, 2007, he Taiwan Fuures Exchange (TAIFEX) has disclosed he rading aciviy for he differen classes of insiuional invesors in he fuures marke. Hence, his daa se provides an opporuniy o consruc he insiuional invesor senimen of he fuures marke and allows us o invesigae he dynamic relaionship beween he insiuional invesor senimen and he marke reurns in he fuures marke. Following Brown and Cliff (2004), Schmeling (2009), and Corredor, Ferrer, and Sanamaria (203), his paper uses he VAR model o invesigae he dynamic relaionship beween he insiuional invesor senimen and marke reurns in he fuures marke. Previous sudies have proposed wo possible explanaions, a mispricing correcion hypohesis and marke risk senimen hypohesis, o inerpre he impac of invesor senimen on subsequen marke reurns. The mispricing correcion effec predics ha invesor senimen is negaively correlaed wih subsequen marke reurns (see Baker & Wurgler, 2006; Schmeling, 2009; Chung e al., 202). As for he marke risk senimen hypohesis, previous sudies sugges ha he marke risk senimen is posiively correlaed o subsequen marke reurns (Frijns, oellen, & Lehner, 2008; Tse & Zhao, 202; Lee & Chang, 203). Addiionally, Brown and Cliff (2004) propose wo effecs, he bandwagon effec and he bargain shopper effec, o explain he impac of marke reurns on subsequen invesor senimen. The bandwagon effec implies ha marke reurns are posiively relaed o subsequen invesor senimen. On he conrary, he bargain shopper effec predics a negaive relaion beween marke reurns and subsequen invesor senimen. We use he above compeing hypoheses o explain our empirical resuls of he VAR model. Our conribuion o he exising lieraure will be wo-fold. Firs, o he bes our knowledge, his is he firs sudy o examine he dynamic relaionship among he senimen indices of foreign as well as domesic insiuional invesors and he fuures reurns. While Brown and Cliff (2004) and Han (2008) use he daa from he CFTC o consruc he proxy of insiuional invesor senimen for he fuures marke, his sudy can direcly calculae he differen ypes of he insiuional invesor senimen in he Romanian Journal of Economic Forecasing XVII (4) 204 4

3 Insiue for Economic Forecasing fuures marke wih he daa from he TAIFEX. Hence, our empirical resuls will deepen our undersanding abou he naure of he dynamic relaionship beween he insiuional invesor senimen and marke reurns in he fuures marke. Second, whereas Brown and Cliff (2004), Schmeling (2009), and Corredor e al. (203) only repor he empirical evidence for he Granger-causaliy ess wih regards o invesor senimen and sock reurns, his paper no only repors he evidence for he Grangercausaliy ess bu also presen he resuls for he ess of cumulaive (ne) effecs for he insiuional invesor senimen and he marke reurns in he fuures marke. In paricular, he ess of cumulaive (ne) effecs can provide empirical resuls for esing our compeing hypoheses. Hence, our sudy sheds ligh on he heoreical explanaions for he relaionship beween he insiuional invesor senimen and marke reurns in he fuures marke. Our empirical resuls show ha he dynamic relaionship beween he senimen of foreign insiuional invesors and he fuures reurns is much sronger han ha of he senimen of domesic insiuional invesors and he fuures reurns. Specifically, he impac of he senimen of foreign insiuional invesors on subsequen fuures reurns is significanly posiive and is in line wih he marke risk senimen hypohesis. The fuures reurn has a significanly negaive effec on he subsequen senimen of foreign insiuional invesors. This finding is in suppor of he bargain shopper effec. Addiionally, he empirical resuls find ha he impac of he domesic insiuional invesor senimen on subsequen fuures reurns is insignifican and vice versa. Our empirical evidence furher indicaes ha he causaliy from he senimen of foreign insiuional invesors o he senimen of domesic insiuional invesors is much sronger han in he reverse direcion. Finally, he impac of he senimen of foreign insiuional invesors on subsequen marke saes is larger han hose of he senimen of domesic insiuional invesors on subsequen marke saes. The remainder of he paper is organized as follows. Secion 2 describes he daa and presens economeric models. Secion 3 repors he empirical resuls. Finally, concluding remarks are presened in Secion DATA, INVESTOR SENTIMENT, AND METHODOLOGY 2.. Daa and Invesor Senimen This paper uilizes he Taiwan Weighed Sock Index (TWSI) and he corresponding index fuures conracs raded on TAIFEX for analysis. The daily fuures closing prices are obained from he TAIFEX. The rading aciviies for he fuures marke are also colleced from he TAIFEX. The long and shor open ineress by various ypes of insiuional invesors for he fuures marke was provided by he TAIFEX since July 2, The open ineress of insiuional invesors for he fuures marke displayed from he TAIFEX are he summaion of he spo monh, he nex calendar monh, and he nex hree-quarer monhs fuures conracs for each ype of insiuional raders. The ypes of insiuional invesors displayed from he TAIFEX are foreign invesors, muual funds, and proprieary raders. This paper defines muual funds and proprieary 42 Romanian Journal of Economic Forecasing XVII (4) 204

4 Insiuional Invesor Senimen and Marke Reurns raders as he domesic insiuional invesors. The sample period used in his sudy is from July 2, 2007 o December, 203. To reduce poenial expiraion effecs, a nearby fuures conrac was rolled over o he nex neares conrac day prior o expiraion of he curren conrac. 5 Following Wang (200), his paper uses daily long and shor open ineress of foreign and domesic insiuional invesors for he fuures conracs o calculae insiuional invesor senimen. As such, he senimen index of insiuional invesor i a ime, SI i,, is calculaed as follows: Si, min(si, ) SIi, =, i = F or D () max(si, ) min(si, ) where F and D are he foreign insiuional invesors and domesic insiuional invesors, respecively. S i, is he aggregae posiion for invesor i a ime. The max (S i, ) and min (S i, ) represen hisorical maximum and minimum aggregae posiion for invesor i a ime over he previous 2 years (or a oal of 52 rading days). In his regard, he sample period for FP and SI i, is from July 22, 2009 o December, 203. The aggregae posiion for invesor i a ime, S i,, is calculaed as follows: S i, OIi,P, OIi,N, =, i = F or D (2) OI + OI i,p, i,n, where OI i,j, is he naural logarihm of open ineres j in dollars for invesor i a ime, j=p or N. P and N are he posiive and negaive open ineress. The posiive (negaive) open ineres of a fuures marke is he long (shor) open ineres Vecor Auoregression Model Previous sudies have shown ha marke reurns and invesor senimen may ac as a sysem. In paricular, Brown and Cliff (2004, 2005) and Schmeling (2009) use he VAR (Vecor Auoregression) model o explore he relaionship beween sock reurns and invesor senimen. Thus, his paper also employs he VAR model o sudy he dynamic relaionship beween he marke reurns and he senimen of insiuional invesors in he fuures marke. The bivariae VAR is esimaed as follows: 6 FR = α + βk FR + λk DSIi, + εfr, k = k = DSIi, = α2 + β FR + λ DSIi, + εi, k = k =, i = F or D (3) 5 To rule ou he expiraion effecs, his paper also uses he sock index reurns as he proxy of marke reurns for our invesigaion. Specifically, his paper uses he spo closing prices of he TWSI for our analysis. The resuls reveal ha he dynamic relaionship beween he senimen indices of foreign and domesic insiuional invesors and he sock index reurns is idenical o hose findings repored in Table 4 and Figure. The resuls are no presened here bu are available upon reques from he auhors. 6 Following Brown and Cliff (2004), his paper uses he difference in he insiuional invesor senimen for our analysis. Romanian Journal of Economic Forecasing XVII (4)

5 Insiue for Economic Forecasing where FR is he reurn of he fuures marke a ime and DSI i, is he difference of he senimen for insiuional invesor i a ime. 7 ε FR, is he residual of he fuures reurns a ime. ε i, is he residual of he difference of he senimen for insiuional invesor i a ime. F and D are he foreign insiuional invesors and domesic insiuional invesors, respecively. To ensure ha he resuls are robus o he chosen number of lags, his paper repors he VAR resuls for up o en lags. By doing so, we can disinguish causaliy and predicabiliy for shor or long ime horizons (see Dufour & Renaul, 998; Lee, Li, & Wang, 200; Lee, Chien, & Liao, 202). In he fuures reurn equaion, he difference of he senimen for insiuional invesor i Granger-causes he fuures reurns, if he null hypohesis ha lagged coefficiens, λ = λ2 =... = λk = 0 (k =, 2, 3,, ), are zero is rejeced. In he difference of he senimen for insiuional invesor i equaion, he fuures reurn Granger-causes he difference of he senimen for insiuional invesor i, if he null hypohesis ha lagged coefficiens are zero, β 2 = β 22 =... = β = 0 (k =, 2, 3,, ), is rejeced. In addiion o Granger-causaliy ess, his paper also examines he cumulaive (ne) effec of he difference of he senimen for insiuional invesor i on he fuures reurns and vice versa. In he fuures reurn equaion, if he null hypohesis ha he sum of he lagged coefficiens ( λ ) is zero is rejeced, he difference of he senimen for k k = insiuional invesor i has a cumulaive (ne) effec on he fuures reurns. In he difference of he senimen for insiuional invesor i equaion, if he null hypohesis ha he sum of he lagged coefficiens ( β ) is zero is rejeced, he fuures reurn k = has a cumulaive (ne) effec on he difference of he senimen for insiuional invesor i. The ess on he sum of he lagged coefficiens allow us o idenify he dynamic ne effec for he fuures reurns and he difference of he senimen for insiuional invesor i. In order o furher verify he empirical resuls, his paper also explores he relaionship among he fuures reurns, he senimen of foreign insiuional invesors, and he senimen of domesic insiuional invesors. The rivariae VAR is esimaed as follows: FR DSI DSI = α F, D, + = α = α βk k = k = k = FR β β 3k FR FR + k F, k k = + + λ DSI λ F, k = k = λ DSI DSI θ 3k F, k = k = DSI θ θ 3k D, DSI DSI +ε D, D, FR, + ε + ε F, D, (4) 7 The paper uses difference in senimen and change in senimen inerchangeably o represen he variaion of insiuional invesor senimen. 44 Romanian Journal of Economic Forecasing XVII (4) 204

6 Insiuional Invesor Senimen and Marke Reurns where FR is he reurn of he fuures marke a ime. DSI F, is he difference of he senimen for foreign insiuional invesors a ime. DSI D, is he difference of he senimen for domesic insiuional invesors a ime. ε FR, is he residual of he fuures reurns a ime. ε F, is he residual of he difference of he senimen for foreign insiuional invesors a ime. ε D, is he residual of he difference of he senimen for domesic insiuional invesors a ime. Similarly, he Granger-causaliy es and he cumulaive (ne) effec are used o explore he relaionship among he fuures reurns as well as he senimen indices of foreign and domesic insiuional invesors. Alhough he Granger causaliy es and he cumulaive (ne) effec will sugges which variables in he model have saisically significan effecs on he fuure values of oher variables in he sysem, i will no be able o reveal wheher unexpeced changes in he value of a given variable have a posiive or negaive effec on he oher variables in he sysem, or how long i would ake for he unexpeced impac of ha variable o work is way hrough he sysem (see Lee, Huang, & Yin, 203). To sudy his issue, his paper uses he GIRF (Generalized Impulse Response) echnique developed by Pesaran and Shin (998) o assess how and o wha exen he unexpeced shocks influence movemens in he fuures reurns as well as he senimen indices of foreign and domesic insiuional invesors over ime. The advanage of he GIRF is ha while he radiional impulse response funcions based on he widely used Choleski facorizaion of VAR innovaions may be sensiive o variable ordering, he GIRF echnique does no depend on he VAR ordering Insiuional Invesor Senimen and Marke Condiions Prior research suggess ha senimen conains useful informaion on marke saes (e.g., Chen, 20; Lee & Chang, 203). In his regard, his paper also examines he impac of insiuional invesor senimen on subsequen marke condiions. Following Cooper, Guierrez, and Hameed (2004), Chen (2009), and Chuang and Susmel (20), his sudy defines up- and down-marke saes as follows: k FR + FR FR Bull =, if AvgFR = > ThR k (5) 0, oherwise k FR + FR + + if =... FR, AvgFR < ThR Bear = k (6) 0, oherwise where Bull is he bull regime (up-marke sae) for he fuures reurns a ime. Bear is he bear regime (down-marke sae) for he fuures reurns a ime. AvgFR is he moving average of he las k and presen values of he fuures reurns a ime. ThR is he hreshold reurn. FR is he reurn of he fuures marke a ime. Then, as in Chen (2009), he probi model is esimaed as follows: P ( Bull + k ) = F ( α Bull + β Bull DSI F, + θ Bull DSI D, ) (7) P ( Bear + k ) = F ( α Bear + β Bear DSI F, + θ Bear DSI D, ) (8) where DSI F, is he difference of he senimen for foreign insiuional invesors a ime. DSI D, is he difference of he senimen for domesic insiuional invesors a ime. k Romanian Journal of Economic Forecasing XVII (4)

7 Insiue for Economic Forecasing 3. EMPIRICAL RESULTS 3.. Descripive Saisics and Preliminary Regression Resuls Table provides he summary saisics and regression analysis for he fuures reurns and he difference in he senimen of insiuional invesors. Panel A of Table repors he mean, sandard deviaion, maximum, minimum, and ADF-es for he level and difference in marke prices as well as he senimen indices of foreign and domesic insiuional invesors in he fuures marke. Panel A of Table shows ha he mean value for he fuures price is The maximum and minimum values for he fuures prices are and , respecively. The maximum and minimum values for he fuures prices sugges ha he fuures marke experiences he differen marke condiions in our sample period. Moreover, he ADF saisic for he fuures prices is -2.75, indicaing ha he fuures prices are no saionary a he 5% level. The mean value of he fuures reurns is and he maximum and minimum values for he fuures reurns are and , respecively. The ADF saisic for he fuures reurns is and is significan a he %. For he senimen of foreign insiuional invesors, he mean value is The ADF saisic for he senimen of foreign insiuional invesors is and is significan a he % level. The mean value of he difference in he senimen of foreign insiuional invesors is close o 0. The ADF saisic for he difference in he senimen of foreign insiuional invesors is and is significan a he % level. As o he senimen of domesic insiuional invesors, he mean value is The ADF saisic for he senimen of domesic insiuional invesors is and is significan a he % level. The mean value of he difference in he senimen of domesic insiuional invesors is The ADF saisic for he difference in he senimen of domesic insiuional invesors is and is significan a he % level. In summary, Panel A of Table shows ha ADF saisics for he fuures reurns and he difference in he senimen indices for foreign and domesic insiuional invesors are all significan a he % level, indicaing ha he fuures reurns and difference in he senimen indices are saionary and can be used for following analysis. Panel A of Table also presens ha he sandard deviaions of he difference in he senimen indices for foreign and domesic insiuional invesors are and , respecively. The findings of he sandard deviaions for he difference in he senimen indices of insiuional invesors imply ha he variaion of he senimen of foreign insiuional invesors ends o be more sensiive o he marke-wide informaion/condiion han hose of domesic insiuional invesors. Panel B of Table repors he preliminary regression resuls for he impac of he senimen of insiuional invesors on he fuures reurns. The resul for he conemporaneous regression analysis reveals ha he difference in he senimen of foreign insiuional invesors is significanly and posiively relaed o he fuures reurns. The regression coefficien for he impac of he difference in he senimen of foreign insiuional invesors on he fuures reurns is and he AdjR 2 is As o he conemporaneous regression analysis wih regard o domesic insiuional 46 Romanian Journal of Economic Forecasing XVII (4) 204

8 Insiuional Invesor Senimen and Marke Reurns invesors, he resul also shows ha he impac of he difference in he senimen of domesic insiuional invesors on he fuures reurns is significanly posiive a he % level. The regression coefficien for he impac of he difference in he senimen of domesic insiuional invesors on he fuures reurns is and he AdjR 2 is Addiionally, Panel B of Table repors he impac of he difference in he senimen indices of foreign and domesic insiuional invesors on subsequen fuures reurns. The empirical resul reveals ha he difference in he senimen of foreign insiuional invesors significanly and posiively affecs subsequen fuures reurns. The regression coefficien for he impac of he difference in he senimen of foreign insiuional invesors on subsequen fuures reurns is and he AdjR 2 is By conras, he difference in he senimen of domesic insiuional invesors has an insignifican effec on subsequen fuures reurns and he AdjR 2 is The resuls for he effec of he senimen of insiuional invesors on he fuures reurns are unchanged even he paper simulaneously includes conemporaneous and lagged difference in he senimen indices for foreign and domesic insiuional invesors, respecively, in he regression model. In summary, for he conemporaneous regression analyses, he empirical findings of Panel B of Table presen ha while he impac of he difference in he senimen of foreign and domesic insiuional invesors on he fuures reurns is significanly posiive a he convenional level, he effec and explanaory power for he domesic insiuional invesors are larger han hose of foreign insiuional invesors. On he conrary, for he effec of he senimen indices of insiuional invesors on subsequen fuures reurns, he empirical resuls show ha he difference in he senimen of foreign insiuional invesors has a greaer effec on subsequen fuures reurns han hose of domesic insiuional invesors. These findings sugges ha he difference in he senimen of foreign insiuional invesors conains more informaion wih respec o marke-wide risk appeie on subsequen fuures reurns. To furher explore he dynamic relaionship beween he insiuional invesor senimen and he marke reurns in he fuures marke, he VAR is used in his paper. The possible explanaions and deailed resuls for he VAR model are presened in he following secion Dynamic Relaionship beween Insiuional Invesor Senimen and Fuures Reurns In his secion, his paper explores he dynamic relaionship beween he insiuional invesor senimen and marke reurns in he fuures marke. Previous sudies have proposed wo possible explanaions, a mispricing correcion hypohesis and marke risk senimen hypohesis, o inerpre he impac of invesor senimen on subsequen marke reurns. 8 For he mispricing correcion effec, Baker and Wurgler (2006), Schmeling (2009), Chung e al. (202), and Baker e al. (202) show ha a high invesor senimen causes asse prices o deviae from heir inrinsic values. The 8 Wang (200) provides evidence ha large speculaor senimen forecass price coninuaions. In conras, large hedger senimen predics price reversals. Since he purposes of insiuional invesors rading in he fuures markes could be hedging, speculaive, or boh, i is no appropriae o explain he relaion beween he insiuional invesor senimen and he fuure reurns following he argumen of Wang (200). Romanian Journal of Economic Forecasing XVII (4)

9 Insiue for Economic Forecasing mispricing is correced when he noise raders are confroned by realizaions of economic fundamenals (Chung e al., 202; Baker e al., 202) or when he mispricing caused by noise raders is so large and arbirageurs find he expeced reurns so grea (Baker e al., 202). As such, a mispricing correcion effec is associaed wih rading aciviy of noise raders and predics ha invesor senimen is negaively correlaed wih subsequen marke reurns. In his regard, if he insiuional invesor senimen of a fuures marke is associaed wih a mispricing correcion effec, he insiuional invesor senimen of a fuures marke is negaively relaed subsequen fuures reurns. As for he marke risk senimen hypohesis, previous sudies presen ha when he marke risk senimen is higher (lower), invesors have a greaer preference for invesing in (selling) risky asses (e.g., Frijns e al., 2008; Tse & Zhao, 202; Lee & Chang, 203). As documened by Frijns e al. (2008), when he senimen wih regard o risk appeies is high, invesors have a preference for invesing in risky asses. By conras, a low invesor risk appeie senimen resuls in selling risky asses. Tse and Zhao (202) sugges ha funds move globally o seek high-yielding asses and he high risky asse markes pricing behavior would reflec risk senimen. As such, if he insiuional invesor senimen of a fuures marke is posiively correlaed wih he marke risk senimen, i is likely ha he insiuional invesor senimen of a fuures marke is posiively associaed wih subsequen fuures reurns. Prior research has explored how marke reurns affec subsequen invesor senimen. Brown and Cliff (2004), Schmeling (2009), and Corredor e al. (203) employ he VAR model o invesigae how sock reurns affec subsequen invesor senimen and he empirical resuls show ha sock reurns Granger-cause invesor senimen. 9 Brown and Cliff (2004) propose wo effecs, he bandwagon effec and he bargain shopper effec, o explain he impac of asse reurns on subsequen invesor senimen. Firs, for a bandwagon effec, he good (bad) reurns during he period drive opimism (pessimism). The bandwagon effec implies ha asse reurns are posiively relaed o subsequen invesor senimen. On he conrary, when invesors see asses becoming a bargain, hey see a buying opporuniy and become bullish. Thus, he bargain shopper effec predics a negaive relaion beween asse reurns and subsequen invesor senimen. Following he bandwagon hypohesis, he fuures reurn is posiively relaed o subsequen insiuional invesor senimen. By conras, if he bargain shopper effec holds, he fuures reurn is negaively correlaed o subsequen insiuional invesor senimen. According o above discussions and compeing hypoheses, he VAR model is used o invesigae he dynamic relaionship beween he insiuional invesor senimen and marke reurns in he fuures marke. The resuls are presened in Tables II o IV. Whereas mos of previous sudies only repor he empirical evidence for he Grangercausaliy ess (e.g., Schmeling, 2009; Corredor e al., 203), Tables II o IV no only repor he evidence for he Granger-causaliy ess bu also presen he resuls for he 9 In paricular, Brown and Cliff (2004) provide evidence ha large sock reurns have a posiive effec on subsequen invesor senimen and small sock reurns are negaively correlaed wih subsequen invesor senimen. 48 Romanian Journal of Economic Forecasing XVII (4) 204

10 Insiuional Invesor Senimen and Marke Reurns ess of cumulaive (ne) effecs. In paricular, he ess of cumulaive (ne) effecs can provide empirical resuls for esing our compeing hypoheses. Table 2 repors he dynamic relaionship beween he difference in he senimen of foreign insiuional invesors and he fuures reurns. Panel A of Table 2 presens he resuls for he Granger-causaliy ess. The empirical resuls show ha here is a bidirecional Granger-causaliy relaionship beween he difference in he senimen of foreign insiuional invesors and he fuures reurns. All he es saisics are significan a he % level, and he resuls are robus wih differen lags. For example, he F-values of causaliy ess for λ = λ2 =... = λk = 0 and β 2 = β 22 =... = β = 0 are and , respecively, a he case of lag 5 (5), and he F-values are all significan a he % level. These empirical resuls are consisen wih he findings of Schmeling (2009) in ha senimen depends on previous reurns and ha reurns depend on previous senimen movemens. Panel B of Table 2 presens he resuls of he sum of he coefficiens es. These empirical resuls provide srong evidence of a posiive effec of he difference in he senimen of foreign insiuional invesors on subsequen fuures reurns, and he resuls are robus wih differen lags. For example, he regression coefficien of he lagged one period of he difference in he senimen of foreign invesor senimen is and is significan a he % level. The sum of he coefficiens, λ k, wih 0 k = lags is and is significan a he % level. Furhermore, Panel B of Table 2 also presens he impac of he fuures reurns on subsequen changes in he senimen of foreign insiuional invesors. The empirical findings show ha he pas fuures reurn is negaively correlaed wih he difference in he senimen of foreign insiuional invesors, and he resuls are robus wih differen lags. For insance, he regression coefficien of he lagged one period of he fuures reurn is and is significan a he % level. Similarly, he sum of he coefficiens, β2 k, wih 3, 5, and 0 lags are - k =.750, , and , respecively, and are all significan a he % level. In summary, he empirical evidence for Panel B of Table 2 suggess ha he impac of he difference in he foreign insiuional invesor senimen on subsequen fuures reurns is in suppor of he marke risk senimen hypohesis in he shor-, mid- and long-ime horizons. 0 Moreover, he resuls for he impac of he fuures reurns on subsequen changes in he foreign insiuional invesor senimen are consisen wih he bargain shopper effec in he shor-, mid- and long-ime horizons. 0 Chuang, Lee, and Wang (203) argue ha invesor opimism leads socks o be overvalued, a leas in he shor run. As such, a high senimen implies ha invesors feel opimisic abou fuure price movemen in he sock markes. The argumen of Chuang e al. (203) implies ha invesor senimen has a posiive effec on subsequen sock reurns a leas in a shorime horizon even invesor senimen is associaed wih a mispricing correcion effec. Since our empirical findings show ha he senimen of foreign insiuional invesor posiively affec subsequen fuures reurns in he shor- and long-ime horizons, we conclude ha he senimen of foreign insiuional invesor is more closely relaed o marke risk senimen. Romanian Journal of Economic Forecasing XVII (4)

11 Insiue for Economic Forecasing Table 3 displays he dynamic relaionship beween he difference in he senimen of domesic insiuional invesors and he fuures reurns. Panel A of Table 3 presens he resuls for he Granger-causaliy ess. The empirical evidence shows ha here is a bi-direcional Granger-causaliy relaionship beween he difference in he senimen of domesic insiuional invesors and he fuures reurns wih lagged one period. The F-values of causaliy ess for λ = 0 and β = 0 2 are and , respecively, and he F-values are all significan a he 5% level. For 3, 5, and 0 lags, he evidence shows ha he difference in he domesic insiuional invesor senimen does no Granger-cause he fuures reurns. The F-values of causaliy ess for λ = λ2 =... = λk = 0 wih 3, 5, and 0 lags are.4063, , and.6499, respecively, and are insignifican a he 5% level. By conras, he empirical findings display ha he fuures reurn Granger-causes he difference in he domesic insiuional invesor senimen for differen lags. For insance, he F-values of causaliy ess for β 2 = β 22 =... = β = 0 wih 3, 5, and 0 lags are , 3.869, and 2.574, respecively, and are all significan a he 5% level. Overall, he empirical resuls for Panel A of Table 3 sugges ha here is a bi-direcional Granger-causaliy relaionship beween he difference in he senimen of domesic insiuional invesors and he fuures reurns in a shor-ime horizon. Furhermore, for he mid- and long-ime horizons, he fuures reurn Granger-causes he difference in he domesic insiuional invesor senimen marke, bu no vice versa. Panel B of Table 3 presens he resuls of he sum of he coefficiens es. The empirical evidence shows ha he difference in he senimen of domesic insiuional invesors has a significanly negaive effec on subsequen fuures reurns in a shorime horizon. The regression coefficien of he lagged one period of he difference in he senimen of domesic invesor senimen is and is significan a he 5% level. However, for he mid- and long-ime horizons, he sum of he coefficiens, k = λ k, wih 3, 5, and0 lags are , , and , and are insignifican a he 5% level. Moreover, Panel B of Table 3 also presens he impac of he fuures reurns on subsequen changes in he senimen of domesic insiuional invesors. The empirical resuls display ha he fuures reurn has a significanly posiive effec on subsequen changes in he senimen of domesic insiuional invesors in a shorime horizon. The sum of he coefficiens, β, wih and 3 lags are and k = , and are significan a he 5% level. On he conrary, for he mid- and long-ime horizons, he empirical findings show ha he pas fuures reurn is insignificanly correlaed wih he difference in he senimen of domesic insiuional invesors. The sum of he coefficiens, β, wih 5 and 0 lags are and , and are k = insignifican a he 5% level. In conclusion, he empirical evidence for Panel B of Table 3 indicaes ha he impac of he difference in he domesic insiuional invesor senimen on subsequen fuures reurns is in suppor of a mispricing correcion 50 Romanian Journal of Economic Forecasing XVII (4) 204

12 Insiuional Invesor Senimen and Marke Reurns hypohesis in a shor-ime horizon. In addiion, he resuls for he impac of he fuures reurns on subsequen changes in he domesic insiuional invesor senimen are in line wih he bandwagon effec in a shor-ime horizon. While he dynamic relaionship beween he senimen of foreign and domesic insiuional invesors and he fuures reurns displayed in Tables II and III can be explained by he compeing hypoheses menioned above, he empirical evidence of Tables II and III indicaes ha he dynamic relaionship beween he foreign insiuional invesor senimen and he fuures reurns is much sronger han ha of he domesic insiuional invesor senimen. In order o furher verify hese empirical resuls, his paper also explores he relaionship among he fuures reurns, he senimen of foreign insiuional invesors, and he senimen of domesic insiuional invesors. The resuls are repored in Table 4. Panel A of Table 4 presens he resuls for he Granger-causaliy ess. The empirical resuls show ha here is a bi-direcional Granger-causaliy relaionship beween he difference in he senimen of foreign insiuional invesors and he fuures reurns. All he es saisics are significan a he % level, and he resuls are robus wih differen lags. For example, he F-values of causaliy ess for λ = λ2 =... = λk = 0 and β 2 = β 22 =... = β = 0 are and , respecively, a he case of lag 5 (5), and he F-values are all significan a he % level. However, he empirical evidence show ha he difference in he senimen of domesic insiuional invesors does no Granger-cause he fuures reurns for all lags. Specifically, he F-values of causaliy ess for θ = θ2 =... = θk = 0 wih, 3, 5, and 0 lags are 0.026, , , and.6304, and he F-values are all insignifican a he 5% level. In addiion, he fuures reurn Granger-causes he difference in he senimen of domesic insiuional invesors only in he shor-ime horizon. The F-value of he causaliy es for β 3 = 0 is and he F-value is significan a he % level. Our empirical resuls also display ha he difference in he senimen of foreign insiuional invesors Granger-causes he difference in he senimen of domesic insiuional invesors in shor-, mid- and long-ime horizons. For example, he F-value of he causaliy es for λ 3 = λ32 =... = λ3k = 0 is a he case of lag 5 (5), and he F-value is significan a he 5% level. Neverheless, he resul shows ha he causaliy from he senimen of domesic insiuional invesors o he senimen of foreign insiuional invesors is no obvious. The difference in he senimen of domesic insiuional invesors only Granger-cause he difference in he senimen of foreign insiuional invesors a he case of lag (). The F-value of he causaliy es for θ 2 k = 0 is and he F-value is significan a he 5% level. Panel B of Table 4 presens he resuls of he sum of he coefficiens es. The empirical resuls provide srong evidence of a posiive effec of he difference in he senimen of foreign insiuional invesors on subsequen fuures reurns, and he resuls are robus wih differen lags. For example, he sum of he coefficiens, λ, k k = wih 5 lags is and is significan a he % level. Addiionally, he empirical Romanian Journal of Economic Forecasing XVII (4) 204 5

13 Insiue for Economic Forecasing findings show ha he pas fuures reurn is negaively correlaed wih he difference in he senimen of foreign insiuional invesors, and he resuls are robus wih differen lags. For insance, he sum of he coefficiens, β, wih and 0 lags are k = and , respecively, and are all significan a he % level. As o he cumulaive effecs for he difference of he domesic insiuional invesor senimen and he fuures reurns, he resuls show ha he difference of he domesic insiuional invesor senimen has insignificanly negaive effecs on subsequen fuures reurns. Specifically, he sum of he coefficiens, θ, are negaive bu insignifican a he k k = 5% level for he l, 3, and 0 lags. Furhermore, he empirical evidence shows ha he impac of he fuures reurns on subsequen changes in he domesic insiuional invesor senimen is significanly posiive in he shor-ime horizon. The regression coefficien, β 3, is and is significan a he % level. As for he cumulaive effecs for he differences in he foreign and domesic insiuional invesor senimen, he resuls show ha he changes in he foreign insiuional invesor senimen have significanly posiive effecs on subsequen changes in he domesic insiuional invesor senimen in he shor-and mid-ime horizons. The sum of he coefficiens, λ 3k, wih, 3 and 5 lags are 0.075, , and 0.640, and are significan a he 5% level. Finally, he evidence shows ha he changes in he domesic insiuional invesor senimen have significanly posiive effecs on subsequen changes in he foreign insiuional invesor senimen in he shor-and long-ime horizons. The sum of he coefficiens, θ, wih and 0 lags are and 0.365, and are significan a he 5% level. As for he ess of he compeing hypoheses, Panel B of Table 4 shows ha he impac of he difference in he foreign insiuional invesor senimen on subsequen fuures reurns is sill in suppor of he marke risk senimen hypohesis in he shor-, mid- and long-ime horizons even we include he difference in he senimen of domesic insiuional invesors in he VAR model. The resuls for he impac of he fuures reurns on subsequen changes in he foreign insiuional invesor senimen are sill consisen wih he bargain shopper effec in he shor-, mid- and long-ime horizons when he difference in he senimen of domesic insiuional invesors is conrolled in he VAR model. However, he impac of he difference in he domesic insiuional invesor senimen on subsequen fuures reurns is insignifican, suggesing ha he senimen of domesic insiuional invesors has lile effec on subsequen fuures reurns afer conrolling he senimen of foreign insiuional invesors in he regression model. Finally, he resuls for he impac of he fuures reurns on subsequen changes in he domesic insiuional invesor senimen are in line wih he bandwagon effec in a shor-ime horizon afer conrolling he difference in he senimen of foreign insiuional invesors. 52 Romanian Journal of Economic Forecasing XVII (4) 204

14 Insiuional Invesor Senimen and Marke Reurns In summary, he resuls of Table 4 display ha he dynamic relaionship beween he foreign insiuional invesor senimen and he fuures reurns remain unchanged afer conrolling he domesic insiuional invesor senimen in he VAR model. By conras, he dynamic relaionship beween he domesic insiuional invesor senimen and he fuures reurns becomes weaker and insignifican afer conrolling he foreign insiuional invesor senimen in he VAR model. These findings are similar in spiri o he findings repored in Tables II and III in ha he dynamic relaionship beween he foreign insiuional invesor senimen and he fuures reurns is much sronger han ha of he domesic insiuional invesor senimen. As such, we conclude ha he relaionship beween he insiuional invesor senimen and marke reurns in he Taiwan fuures marke is dominaed by he senimen of foreign insiuional invesors. Figure displays he generalized impulse responses of he fuures reurns and senimen indices of insiuional invesors. A Mone Carlo simulaion wih 5000 replicaions is used o obain he error bands and he 95% confidence level. For he effec of unexpeced shocks of he insiuional invesor senimen on he fuures reurns, he resuls show ha an unexpeced shock from he difference in he senimen of foreign insiuional invesors has a significanly posiive impac on he fuures reurns in he nex rading days. However, an unexpeced shock from he difference in he senimen of domesic insiuional invesors has an insignifican effec on subsequen fuures reurns. For he effec of unexpeced shocks of he fuures reurns on he insiuional invesor senimen, he resul shows ha he difference in he senimen of foreign insiuional invesors responds negaively o unexpeced shocks from he fuures reurns in he following rading days. The evidence displays ha he difference in he senimen of domesic insiuional invesors responds posiively o unexpeced shocks from he fuures reurns in he nex rading day. Overall, he resul of Figure is similar in spiri o he findings repored in Panel B of Table 4 in ha he senimen of foreign insiuional invesors has a larger effec on he fuures reurns han he senimen of domesic insiuional invesors Insiuional Invesor Senimen and Subsequen Marke Condiions Chen (20) and Lee and Chang (203) presen ha senimen can be used o explained and prediced subsequen marke condiions. In his regard, he paper invesigaes how he senimen of foreign and domesic insiuional invesors affecs subsequen marke saes in his secion. If he senimen of insiuional invesors is correlaed wih he marke risk senimen, we hypohesize ha he impac of he senimen of insiuional invesors on subsequen bull (bear) marke saes should be posiive (negaive). On he conrary, if he senimen of insiuional invesors is associaed wih a mispricing correcion effec, he senimen of insiuional invesors has a negaive (posiive) effec on subsequen bull (bear) marke saes. The empirical resuls are presened in Table 5. Panels A and B of Table 5 employ he value of 0.00 as he hreshold reurns (ThR=0.00) o ideniy he bull and bear regimes. For a robusness check, Panels C and D of Table 5 uses he value of as he hreshold reurns (ThR=0.0025) o The number of opimal lags for he generalized impulse response funcions is deermined by he Akaike informaion crieria (AIC). Romanian Journal of Economic Forecasing XVII (4)

15 Insiue for Economic Forecasing ideniy he bull and bear regimes. Since he resuls of ThR=0.00 are similar o hose of ThR=0.0025, we only focus on he findings wih ThR=0.00 as in Chen (2009). Panel A of Table 5 repors he resuls of he bull marke saes wih ThR=0.00. The evidence shows ha he difference in he senimen of foreign insiuional invesors has a significanly posiive effec on subsequen bull marke saes for all ime horizons. For example, he regression coefficiens of β Bull for he lags of, 3, 5 and 0 are ,.8775,.270, and , and all of he regression coefficiens are significan a he 5% level. By conras, he difference in he senimen of domesic insiuional invesors has an insignifican effec on subsequen bull marke saes for all ime horizons. The regression coefficiens of θ Bull for all lags are insignifican a he 5% level. Panel B of Table 5 repors he resuls of he bear marke saes wih ThR=0.00. The resuls show ha he difference in he senimen of foreign insiuional invesors has a significanly negaive effec on subsequen bear marke saes for all ime horizons. For insance, he regression coefficiens of β Bear wih 5 and 0 lags are and and are all significan a he 5% level. On he conrary, he difference in he senimen of domesic insiuional invesors has an insignifican effec on subsequen bear marke saes for all ime horizons. The regression coefficiens of θ Bear for all lags are insignifican a he 5% level. In summary, he resuls of Table 5 presen ha he impac of he difference of he senimen of foreign insiuional invesors on subsequen marke saes is much sronger han ha of he difference of he senimen of domesic insiuional invesors. The empirical evidence also suggess ha he senimen of foreign insiuional invesors is associaed wih he marke risk senimen. Overall, he resuls of Table 5 are in line wih he findings displayed in Table Robusness Checks To furher check our resuls, we also use he previous 3 years daa o calculae he senimen indices of foreign and domesic insiuional invesors. Then, we re-run he dynamic relaionship among he foreign insiuional invesor senimen, he domesic insiuional invesor senimen, and fuures reurns and he impac of he senimen of foreign and domesic insiuional invesors on subsequen marke saes. The resuls are presened in Tables VI o VII. Table 6 presens he resuls of he rivariae VAR model for he senimen indices of foreign as well as domesic insiuional invesors and he fuures reurns wih using he prior 3 years daa o calculae insiuional invesor senimen. Panel A of Table 6 presens he resuls for he Granger-causaliy ess. Panel B of Table 6 repors he resuls of he sum of he coefficiens es. The empirical resuls of Table 6 are similar o hose findings repored in Table 4. More specifically, he resuls for he Grangercausaliy ess show ha here is a bi-direcional Granger-causaliy relaionship beween he difference in he senimen of foreign insiuional invesors and he fuures reurns for he shor-, mid-, and long-ime horizons. The F-values of causaliy ess for λ = λ2 =... = λk = 0 and β 2 = β 22 =... = β = 0 are all significan a he % level in he shor-, mid-, and long-ime horizons. The empirical evidence of he Granger-causaliy ess also show ha he difference in he senimen of domesic insiuional invesors does no Granger-cause he fuures reurns for all lags. The F- 54 Romanian Journal of Economic Forecasing XVII (4) 204

16 Insiuional Invesor Senimen and Marke Reurns values of causaliy ess for θ = θ2 =... = θk = 0 wih, 3, 5, and 0 lags are , 0.357, , and.5062, and he F-values are all insignifican a he 5% level. In addiion, he Granger-causaliy ess display ha he fuures reurns Grangercause he difference in he senimen of domesic insiuional invesors only in a shorime horizon. The F-value of he causaliy es for β 3 = 0 is and he F-value is significan a he 5% level. Finally, he resul shows ha he causaliy from he senimen of foreign insiuional invesors o he senimen of domesic insiuional invesors is much sronger han in he reverse direcion. As for he sum of he coefficiens es, he empirical resuls provide srong evidence of a posiive effec of he difference in he senimen of foreign insiuional invesors on subsequen fuures reurns, and he resuls are robus wih differen lags. For example, he ess for sum of he coefficiens, λ, are all posiively significan a he % k k = level. The empirical findings also show ha he pas fuures reurns are negaively correlaed wih he difference in he senimen of foreign insiuional invesors, and he resuls are robus wih differen lags. For insance, he sum of he coefficiens, k = β, are all negaively significan a he 5% level. Moreover, he resuls show ha he difference of he domesic insiuional invesor senimen has insignifican effecs on subsequen fuures reurns. The sum of he coefficiens, θ, are all k insignifican a he 5% level. In addiion, he empirical evidence shows ha he impac of he fuures reurns on subsequen changes in he domesic insiuional invesor senimen is significanly posiive in he shor-ime horizon. The regression coefficien, β 3, is and is significan a he 5% level. Finally, our empirical resuls indicae ha he foreign insiuional invesor senimen is a significanly posiive predicor of he domesic insiuional invesor senimen bu here is no evidence of he domesic insiuional invesor senimen influencing he foreign insiuional invesor senimen. Overall, he cumulaive effecs of Table 6 show ha he foreign insiuional invesor senimen and he fuures reurns are consisen wih he marke risk senimen hypohesis and he bargain shopper effec. However, he relaionship beween he domesic insiuional invesor senimen and he fuures reurns is insignifican. Figure 2 displays he generalized impulse responses of fuures reurns and senimen of foreign and domesic insiuional invesors wih using he prior 3 years daa o calculae insiuional invesor senimen. The empirical evidence of Figure 2 is idenical o he resuls repored in Figure. The resuls show ha an unexpeced shock from he difference in he senimen of foreign insiuional invesors has a significanly posiive impac on he fuures reurns in he nex rading days. However, an unexpeced shock from he difference in he senimen of domesic insiuional invesors has an insignifican effec on subsequen fuures reurns. Furhermore, he difference in he senimen of foreign insiuional invesors responds negaively o unexpeced shocks from he fuures reurns in he following rading days. Finally, he k = Romanian Journal of Economic Forecasing XVII (4)

17 Insiue for Economic Forecasing difference in he senimen of domesic insiuional invesors responds posiively o unexpeced shocks from he fuures reurns in he nex rading day. Table 7 repors he impac of senimen of foreign and domesic insiuional invesors on subsequen condiions of he fuures reurns wih using he prior 3 years daa o calculae insiuional invesor senimen. The evidence shows ha he impac of he difference in he senimen of foreign insiuional invesors on subsequen marke saes is larger han hose of he difference in he senimen of domesic insiuional invesors on subsequen marke saes. Specifically, he difference in he senimen of foreign insiuional invesors has a significanly posiive (negaive) effec on subsequen bull (bear) marke saes. However, he impac of he difference in he senimen of domesic insiuional invesors on subsequen marke saes is insignifican and is no clear. The resuls of Table 7 are idenical o hose findings repored in Table V. 4. Concluding Remarks This paper examines he dynamic relaionship beween he insiuional invesor senimen and he marke reurns in he fuures marke. Previous sudies have consruced invesor senimen wih he daa from he sock marke, and hen examine how he invesor senimen of he sock marke affecs sock marke reurns (e.g., Brown & Cliff, 2004, 2005; Baker & Wurgler, 2006; Baker e al., 202; Chung e al., 202). Furhermore, prior lieraure has employed he rading aciviy of he fuures marke o calculae invesor senimen and explores he impac of he invesor senimen on he fuures reurns (Wang, 200) and opion prices (Han, 2008). However, o he bes of our knowledge, no work has been done on he dynamic relaionship beween he insiuional invesor senimen by various ypes of he invesors in he fuures marke and he fuures reurns. Accordingly, he curren paper aemps o fill his void. The empirical resuls of Granger-causaliy ess show ha he senimen of foreign insiuional invesors Granger-causes he fuures reurns and vice versa. The empirical evidence of Granger-causaliy ess also presens ha he senimen of domesic insiuional invesors does no Granger-cause he fuures reurns. In addiion, he fuures reurn Granger-causes he senimen of domesic insiuional invesors only in he shor-ime horizon. Finally, our empirical resuls show ha he foreign insiuional invesor senimen is a significan predicor of he domesic insiuional invesor senimen bu here is no evidence of he domesic insiuional invesor senimen influencing he foreign insiuional invesor senimen. In addiion o using he Granger-causaliy ess o explore he dynamic relaionship beween he insiuional invesor senimen and he marke reurns in he fuures marke, his paper also examines he cumulaive (ne) effec beween he senimen for insiuional invesor and he fuures reurns. The empirical resuls provide srong evidence of a posiive effec of he senimen of foreign insiuional invesors on subsequen fuures reurns. This finding is in line wih he marke risk senimen hypohesis (see Frijns e al. 2008; Tse & Zhao, 202). In addiion, he empirical findings also show ha he pas fuures reurn is negaively correlaed wih he 56 Romanian Journal of Economic Forecasing XVII (4) 204

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