Investor Sentiment: An empirical study on Swedish Industries

We decompose the monthly Swedish consumer confidence index into a rational part based on fundamentals and an irrational part based on exogenous, irrational beliefs. Subsequently, we investigate the impact of investor irrationality and its short-term predictability on industry returns in Sweden. In addition, we provide an explanation to the reason some industries are more prone to investor sentiment than others. We predict that young industries that are complex and characterised by risky projects, dependence on intangible assets, and that have high growth potential are more exposed to investor sentiment than mature and core-industries with stable cash flows. We provide evidence of a short-term predictability of investor sentiment on future industry returns on the Swedish stock market. Also, in line with our predictions, we find that small industries, that experience high growth, that are dependent on intangible assets, and have more volatile cash flows are more exposed to investor sentiment. However, we find that core-industry returns, contrary to the other industries, have a positive relationship with last period investor sentiment