Explosion Disasters,Investor Sentiment And Stock Markets

The efficient markets hypothesis(EMT)assumes investors are essentially rational.To the extent that some investors are irrational,their random trades cancel each other and thus leave no impact on prices.To the extent that investors are irrational in similar ways,rational arbitrageurs would bring the prices back to the fundamentals.Researchers in behavioral finance have challenged the EMT on various grounds and assume investors are sentimental and arbitrages are limited.As the theory of limited arbitrage is based on the behavior of rational actors,economics is better at understanding such behavior.Therefore we understand a lot more about the limits of arbitrage than we do about investor sentiment.In this paper,we use explosion disaster as sentiment indicator to analyze its effect on stock abnormal returns.According to the province of the explosion event,daily returns of stocks of certain companies are selected.Rationally speaking,explosion might have some negative effect on the nearing company's fundamental factor.Rational investors are expected to accurately analyze the severity of the explosion and its possible influence on the target company.Not considering the techniques it involves,"attention is a scare cognitive resource" and investors' limited attention drives them to category learning.Concretely,investors tend to analyze geographic or industrial information rather than company level information.Therefore,geographic proxy as sentiment load would make a difference among abnormal returns of those companies with province information and those without for a short period after explosions happened.Those with province information in names experience a comparatively quick and significance negative abnormal returns.As robustness test,propensity score match is used to rule out the possibility that the companies that have province information in names tend to share certain characteristics and those characteristics are the reason why those companies are under larger and quicker impact of the explosion disasters.Moreover,abnormal returns are estimated under the CAPM and Four-factor models respectively for the analysis.Lastly,big issues such as Asia economic crisis are deleted from the sample to rule out the huge negative pressure those issues made on the whole market.