Studies that seek to forecast stock price movements often consider measures of market sentiment or stock return momentum as predictors. Recent research shows that a multiplicative combination of sentiment and momentum can help predict the return on the Standard & Poor’s 500 stock index over the next month. This predictive power derives mainly from periods when sentiment has been declining over the past year and recent return momentum is negative—periods that coincide with an increase in investor attention to the stock market as measured by a Google search volume index.
You may want to check the following papers out. I think they will be helpful in this regard.
Investor sentiment in the stock market
M Baker, J Wurgler - Journal of economic perspectives, 2007 - aeaweb.org
A survey of behavioral finance
N Barberis, R Thaler - Handbook of the Economics of Finance, 2003 - Elsevier
The influence of individuals' subjectivity including their perceptions and intentions on their financial decision-making is supported by the literature field of behavioral finance. This is not only influenced by the level of household confidence that is a measurable indicator by the country's economic authorities, but also by the behavioral and psychological biases of financial intermediaries acting on behalf of households. Subjective behaviors that are in fact compotational bias explain the movement of stock prices. These biases are sheep behavior, moral hazard, adverse selection, risk aversion, excessive risk taking, and so on. The household confidence index may be an indicator to be taken into account in predicting price developments, especially in the context of a fundamentalist (long-term) analysis where a cointegration model will be used for example.
Dear Olatunji
Yes, sentiment and expectations affect portfolio choice and are related to stock returns. Some relevant literature:
https://onlinelibrary.wiley.com/doi/full/10.1111/j.1540-6261.2006.00885.x
https://onlinelibrary.wiley.com/doi/full/10.1111/j.1540-6261.2007.01232.x
Article Investor Sentiment and the Near Term Stock Market
https://onlinelibrary.wiley.com/doi/full/10.1111/j.1540-6261.2007.01262.x
Article Investor Sentiment and the Closed-End Fund Puzzle
https://www.aeaweb.org/articles?id=10.1257/jep.21.2.129
Article Consumer confidence and stock returns
https://onlinelibrary.wiley.com/doi/full/10.1111/j.1540-6261.2006.01063.x
Article Sentiment Dynamics and Stock Returns: The Case of the German...
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