Measuring Impact of Market Sentiment On Stock Prices

Volume 9, Issue 10, October – 2024 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165 https://doi.org/10.38124/ijisrt/IJISRT24OCT601
VISVESVARAYA TECHNOLOGICAL UNIVERSITY

CENTER FOR PG STUDIES
KUSNOOR ROAD, KALABURAGI – 585105, KARNATAKA
MASTER OF BUSINESS ADMINISTRATION
A RESEARCH ON
IMPACT OF MARKET SENTIMENT ON STOCK PRICES
Measuring Impact of Market Sentiment on

Stock Prices
Prepared by
Neha Begum
(3VY23BA057)
Under the Guidance of

Manjunath Awalakki
Abstract:- This study considers the impact of investor I. INTRODUCTION

sentiment on stock market prices, it is when something
beyond traditional economic factors, such as emotions or Market sentiment is thus a factor that helps give stock
perceptions that play dominating role in driving prices a direction even beyond the traditional sets of
psychological and real pricing. This behaviour in financial performance and economic indicators. It can
investor sentiment often leads to irrational decision simply be said as the attitude or perception held by
making, always influenced by news, social media and the investors at any given time towards financial markets or a
movements of markets. This will make stocks price more particular stock. This notion of sentiment can influence
volatile. Through sentiment analysis, historical stock thinking by numerous factors ranging from news events to
data and behavioural finance models the study examines a release of data, geopolitical occurrences, social media
times when there were significant movements in the among others. While fundamentally the stocks are
market. These trends suggest that happy days can cause anchored into a company's earnings, assets, and prospects,
major prices to rise (along with the sun) and bad news market sentiment may also cause price movements that
can punch holes in a report even if business hasn't really hinge on emotions such as fear, optimism, or uncertainty.
looked any worse. The regulators and the investors As is often clear during volatility periods when collective
should understand that sentiment can improve the fear, panic, or exuberance swings appear to overpower
efficiency of the stock price-prediction algorithms as rational action, market sentiment behaves more intensely
well as bring anomalies to light in the market. The upon prices for stocks. Positive sentiment tends to make
study of market sentiment and its effect on the stock the stock more expensive because an investor tries to keep
price. In the given paper of research, it is easy to notice up with this growth; on the other hand, if there's negative
the impact of interaction between investor sentiment sentiment, it may tend to sell off even when the
and stock price. fundamentals are the same.
Keywords:- Stock Price, Market Sentiment, Investor A further analysis will be presented on how multiple
Sentiment. indicators of sentiment such as investor confidence and
media tone may be applied for predicting market trends
and guiding investment strategies. The relation with
intrinsic value is lost in the process so that price volatility
is the result. In one case of highly optimistic feelings,
stock prices will rise, sometimes even producing bubbles.
IJISRT24OCT601 www.ijisrt.com 624

Negative sentiment may help in causing even sharper than mere logical forecasts of financial fundamentals. The
declines even when company fundamentals haven't work discusses both negative and positive sentiment
changed. This research aims to explore how shifts in building up under optimistic and pessimistic market
investor sentiment affect the prices of the stock. This conditions.
involves observing the mechanisms behind the movement
in the market and the overall implications when it comes to II. LITERATURE REVIEW
an individual's stability and bigger-picture stability. Price
volatility can result from stock prices deviating from their Key studies have established that investor sentiment
fundamental values because of changed moods among which is constructed by emotions, media news, and trends
investors, influenced by news, social media, and market in the market can cause noticeable divergences in the
trends. Where corporate fundamentals remain unchanged, stocks from their underlying values. Researchers such as
positivity can cause serious losses, while pessimism pushes Shiller (2000), and also Baker & Wurgler (2007), argue
the stock price up and periodically blows up the bubble. that rather than shifts in the underlying fundamentals of the
This research paper is an attempt to understand the economy, it is sentiment that primarily drives most market
mechanics that lie behind such sentiment-driven market bubbles and busts.
movements and how changes in the investor mood
influence stock prices. More than that, the study is According to their study, overvaluation of stocks
designed to be informative of concrete avenues for becomes typical when the optimism level is very high,
investors and policymakers when it comes to recognizing whereas excess sell-offs may result from pessimism and
and responding to sentiment-induced volatility in a way fear. Correct as well as speculative information flows may
that would improve decision-making and maintain market cause rapid shifts in investor mood and stock prices-for
stability. Even with no noticeable change in the economic example, such papers as those by Tetlock (2007),
climate or the performance of a firm, many studies have employing sentiment analysis from news and social media
shown the significant contribution of investor emotion to to predict reactions of the stock market.
short-term price movements. This is perhaps most vividly
captured in the dot-com bubble and the financial crisis of In totality, the literature points out how urgently it is
2008-two of the most contentious examples of market becoming to grasp this aspect of investor sentiment in the
anomalies wherein the level of pricing was more prediction of stock price movements and the great demand
dependent on sentiment than it was intrinsic. The role of for the mechanisms that can dampen the impact of
mood in investment decisions is extremely pivotal, sentiment on financial markets. Consolidating all these
therefore acting as a challenge to those authorities tasked findings, this research explores the mechanism through
with managing markets toward financial stability. These which sentiment affects the equity prices as well as
factors have created heightened volatility and strategies of investors and regulatory bodies to control the
responsiveness of market mood, such that the speed of volatility in the face of sentiment.
news dissemination is very prompt. It is this reason that
short-term market fluctuations, often than not, reflect the Later, Baker and Wurgler (2006) developed the
emotions of a group rather than a dispassionate view of a Investor Sentiment Index which found empirical evidence
company's core competencies or macroeconomic data. of significant effects of sentiment on stock prices
especially in small business and volatility-driven markets.
It searches for the ways through which sentiments in the The result thus vindicates the hypothesis that sentiment can
market influence stock prices as it explores the behavioural indeed create anomalies as it shows that, when sentiments
biases controlling the investor decisions. It further digs are high, particular stocks are overpriced, and when
into past market data to prove that changes in sentiments sentiments are low they are undervalued.
have been correlated with price correlations in the market.
It tries to provide detail on the control and reduction of Moreover, Wurgler, Baker, among others have
volatility based on emotions. emphasized how public talk and media affect investor
sentiment. Tetlock's 2007 study, through the inspection of
A. Objectives of the Research: news stories influencing market behavior showed that the
 Examine the connection between stock price volatility negative news sentiment will bring falls in stock price.
and investor sentiment Thus, information transmission is a factor which is as well
 Determine the behavioural biases that cause sentiment a very important aspect influencing market emotion. The
driven changes in the Market same way in which the dawn of social media has come to
 Create plans to reduce the influence of emotions on open up opportunities in research. Sites like Reddit and
investment Choices Twitter have acted as triggers for flash changes in public
opinion that influence trading decisions, and have been
B. Scope of the Research: proven by the 2021 stock surges of Gamestop and AMC.
This study examines how market sentiment affects Various approaches such as surveys, market data,
stock prices and provides an in-depth study of the sophisticated text analysis, and machine learning
behavioural and psychological aspects that affect investors' algorithms have been used to quantify sentiment in
choices. It is trying to show how psychology influences the empirical research. Barberis, Shleifer, and Vishny (1998)
short-term fluctuations of stock prices in markets rather as well as Hirshleifer and Shumway (2003) findings are

examples of the effect of emotions in mispricing and  Sentiment Data

market inefficiency, which is likely to influence the trade Investors' sentiment shall be captured by the help of
tactic. tools in sentiment analysis that analyze news articles,
social media posts such as Twitter and Reddit, even
In conclusion, there is empirical evidence showing a financial reports. This will give derived scores based on
complex linkage between stock market prices and investor the NLP techniques that capture both positive and negative
emotions and hence underlines the important influence that sentiments as well as neutrality.
psychological and emotional factors could have on the
behavior of markets. It is necessary for policymakers as  Sample Group
well as investors to come to grips with these dynamics We will concentrate on an illustrative sample of
since information moves rapidly and financial markets stocks, drawn across distinct sectors with the emphasis on
increasingly become integrated. Therefore, based on that small- to mid-cap companies with a view to estimating the
rationale, our study delves into what drives sentiment- influence of sentiment on stocks that happen to be
driven volatility and how that interacts with regulation and comparatively sensitive to emotional influences.
effective investment strategies. Alternatively, large-cap stocks may also be drawn as
control measures for purposes of comparison with other
III. METHODOLOGY RESEARCH stocks.
It is on this mixed-method approach that the current  Event Study Methodology

study will consider how market sentiment can influence An event study will be conducted to analyze reactions
the stock price using a quantitative analytical method in the stock price around particular news events or shifts in
supplemented with qualitative analysis to present a more sentiment and therefore allow measures of abnormal
holistic view on how investor sentiment affects market returns in response to shifts in investor sentiment.
behavior.
Table 1: Summary of Data Collection
Data Type Source Time Number of Data Description

Period
Stock Prices Bloomberg, Yahoo 2022-23 1,000+ Historical daily prices of 50 stocks.
Finance Sentiment Scores
Sentiment Scores Twitter, Reddit, 2022-23 1,000+ Sentiment scores based on the result of
News Sources NLP performed on social media, news
articles, and online forums.
Trading Volume Bloomberg, Yahoo 2022-23 1,000+ Volume for selected stocks
Finance
Volatility Index (VIX) CBOE 2022-23 1,000+ VIX index values in order to measure the
market uncertainty
Macroeconomic Data World Bank, IMF 2022-23 100+ GDP and inflation levels
Table 2: Regression Model Output:
Sentiment Index (β1) Trading Volume (β2) Volatility
Coefficient 0.75 0.10 _0.30

Error 0.12 0.05 0.08
p-valve 0.001 0.02 0.001
Significance (p < 0.05) (p < 0.05) (p < 0.05)

 Interpretation hasty decisions under the pressures of the volatile

Even though negative VIX values indicate the fact marketplace. Furthermore, the findings also suggest that
that increased market volatility influences the stock price for maintaining markets in a stabilized state and forming
fall, the positive coefficient (β1 = 0.75) indicates that a defenses against distortion caused by emotions, the
higher score in sentiment indices reveals a higher governing bodies had to carefully monitor all
fluctuation in the stock prices. developments of sentiments. Therefore, the study questions
the integration of traditional financial analysis with
 Event Study Findings: behavioural insights as it is crucial for better navigation of
contemporary complex financial markets.
Change in Event Stock Price (%)Sentiment Score: REFERENCES

+5.2%~0.8 (Positive) Days Before/Days After Event
Earnings Announcement (AAPL)-3% + 8% [1]. Wurgler, J., and Baker, M. (2006). The cross-section
Interest Rate Increase -3.5% - 0.6 (Down)-2% to -6% of stock returns and the sentiment of investors. 1645–
Launch of a New Product (TSLA)0.9 (Positive) +7.0%+2% 1680 in The Journal of Finance, 61(4).
< 10% [2]. To be read to understand how investor mood impacts
on returns of equities especially regarding to smaller
more volatile stocks.
 Interpretation: [3]. R. J. Shiller (2000). Exuberance Without Reason.
The aberrant stock price returns around significant [4]. Tversky, A, and D. Kahneman (1979): A risk-averse
events are displayed in the table. Product launches and decision-making framework. 263-292 in Econometric
interest rate hikes are examples of positive sentiment events •\\tThis was a pioneering research that showed
that cause prices to rise, while these occurrences which are behavioral biases such as loss aversion that have more
negative sentiment events cause price reductions. extensive implications on sentiment-driven stock
market decisions.
IV. FINDINGS [5]. According to Tetlock. The role of the media in the
stock market: providing material to investor emotion.
Investor mood, the research establishes, plays a huge 1139–1168 in The Journal of Finance, 62(3).
role in the short-term stock price moves that ultimately [6]. \\tTetlock relates the analysis behind news sentiment
give rise to the deviations from fundamental values. with market activity to show how media sentiment
Negative sentiment would generally be expected to often impacts the price of stocks.
herald rapid falls even without any changes in the [7]. Barberis, N., Vishny, R., and Shleifer, A. (1998). An
fundamentals of company performance, whereas positive investor sentiment model. 307–343, Journal of
sentiment buoyed by optimism, news, and market trends Financial Economics, 49(3).
tends to be inflationary for stock values and occasionally [8]. This paper identifies and discusses psychosocial
result in bubbles. This has been associated with mechanisms from which mispricing in financial
overconfidence and herd mentality biases. The discussion markets is derived and predicts how investor
shows that the sentiment-free companies are generally sentiment will impact prices.
larger and stable companies with smaller equities, which [9]. Shumway, T., and D. Hirshleifer (2003). Greetings,
are more prone to greater volatility. Secondly, these sun: the weather and stock returns. 1009–1032 in The
techniques of sentiment analysis tracing the sentiment from Journal of Finance, 58(3).
news and social media have proven instrumental in [10]. This would confirm the argument that issues are non-
forecasting short-term changes in the market. These fundamental issues influencing the market and thus
findings underscore the need for regulators to be cognizant far-flung with stock returns and investor sentiment, as
of emotion when applying policies and for investors to be explained in the discussion of this paper.
cognizant of sentiment when formulating their strategies. [11]. Fama (E. F.) 1998. Behavioral finance, long-term
returns, and market efficiency. 49(3), 283-306,
V. CONCLUSION Journal of Financial Economics.
[12]. In this paper, Fama discusses anomalies caused by
In conclusion, it follows that stock prices are sentiment and behavioral factors while he reviews
considerably influenced by the sentiment of the investors; evidence which refutes the Efficient Market
this often manifests in high market volatility. This study Hypothesis.
illustrates how psychological drivers such as optimism, [13]. Wurgler, J., and Baker, M. (2007). Investor views
fear, and herding behavior drive prices away from their regarding the stock market. 129–152 in Journal of
fundamental values, while typical financial theories focus Economic Perspectives, 21(2).
on fundamental issues. Fluctuations are more apparent in
smaller, highly volatile stocks because in those cases,
actions founded on less logic have a larger impact. Hence,
it focuses on highlighting the importance that needs to be
generated by incorporating sentiment analysis within
investment strategies in order to minimize risks and avoid

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Volume 9, Issue 10, October – 2024 International Journal of Innovative Science and Research Technology

ISSN No:-2456-2165 https://doi.org/10.38124/ijisrt/IJISRT24OCT601

VISVESVARAYA TECHNOLOGICAL UNIVERSITY

MASTER OF BUSINESS ADMINISTRATION

Measuring Impact of Market Sentiment on

Under the Guidance of

Abstract:- This study considers the impact of investor I. INTRODUCTION

IJISRT24OCT601 www.ijisrt.com 624

IJISRT24OCT601 www.ijisrt.com 625

examples of the effect of emotions in mispricing and  Sentiment Data

It is on this mixed-method approach that the current  Event Study Methodology

Table 1: Summary of Data Collection

Data Type Source Time Number of Data Description

Table 2: Regression Model Output:

Sentiment Index (β1) Trading Volume (β2) Volatility

Coefficient 0.75 0.10 _0.30

IJISRT24OCT601 www.ijisrt.com 626

 Interpretation hasty decisions under the pressures of the volatile

Change in Event Stock Price (%)Sentiment Score: REFERENCES

IJISRT24OCT601 www.ijisrt.com 627

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