Bitcoin & Crytocurrency – a hasslefree future crypted or

Sentiment hype created

Aging from barter to Crypto- an age well spent or an airy

Future

Crptocurrency- everything and anything from C to Y of

finance, Money , Trading, Payments to Yeild

Decrypting Cryptocurrency – A Blockchain from Blinded

Cash, Web Based Money, Bit gold , Hashcash to Bitcoin

A narrative literature review using different academic databases

such as Google scholars, Scopus, Web of science and Springer
link of narrative literature review is a methodological approach
that aims to establish a detailed understanding and critical
evaluation of knowledge relevant to a particular topic and
exponentially relevant to a particular topic. Narrative literature
review is not meant to be exhaustive it is selective in the content
it was as aiming at advancing and contributing to theory
development. Unlike systematic review compiling a sample of
data does not necessarily really require it to be representative
that need sound elaboration and clear conceptualisation and
given the multiple perspectives from which crypto currencies
have been approached, undertaking a narrative literature on the
paper of Nakamoto 2008 it as it represents the first preference
on crypto currency and has been recognised as a seminal work.

Crytocurrency “ It Seems like the dotcome bubble all over again

or the housing bubble all over again” said by Noble prize
winning Economist robert Shiller while asked about
cryptocurrency. (Shiller, 2017). The meteroic rise in the price of
bitcoin in 2017 to its massive success and popularity including
the smallest and the least expierenced of investors and traders, it
gives a glimpse of how crptocurrency have evolved the realm of
savy investors and experts to everyday traders.

Back in the 1990s cryptographer David Chaum created a first of

its kind online money in Netherlands called as Digi cash as an
extension of encrytion algorithm popular during those times
known as RSA. This encryption technology along with its e-
cash product generated a hype in the media, but the indiffernce
of the invertor let to its early demise in 1998.

But his innovation helped in figuring a digital equivalent to

keep the whole system anonymous and prevent double spending
by inventing a Serial no. called as “blind signature” in
crytography. In 1998 Chaum along with other cryptographer
Naor and Fiat propose off-line electronic cash. In a paper
Okamoto and Ohta use “ Merkle Trees” to create a system that
allows you to divide your subdivide your coins.

The Second generation of Internet money was PayPal on the

based on the learnings from DigiCash which provided its users
the ability to transfer money from merchants and buyers
respectively using a seamless peer-to-peer money transfer
system. The significant event in the history of crypto currency
in 2018 was a sub-prime mortgage crisis which nearly crippled
the financial system of some world’s major financial
institutions proving a kind of wake up call to many of the world
financial economies which led to the emergence of now
popularly known as ‘Blockchain’ which is the foundation of
cryptocurrencies as we know them.(Martin Quest,
Crytocurrency master Guide,pg10.)
As per Merkle, Hashcash is one of the successful pre- bitcoin
digital currencies developed in 1990s to serve purposes like
reducing mail spam, prevent Distributed Denial of Services
(DdoS) attacks and many other modern digital currencies also
uses PoW algorithm in generating and distributing new coins.

Bitcoin was first proposed in 2008 by Satoshi Nakamoto a

pseudonymous scientist. It does not require a central server but
it relies on a peer to peer network which is the irrepressible in
every way as we look at green addresses and micro payments
which allow us to do off-line payments under certain
assumptions (Bitcoin and Crytocurrency Technologies, Arvind
Narayan, Joseph Bonneau,pg 8) and since then bitcoin has
gained a growing attention among investors, researchers,
financial institution and policymakers. The evolution of the
crytocurrency advocated is as under

a. 1st advocates being liberarians and true believers in crypto

currencies critical of the global financial crisis 2008-09,
saw blockchain as a mechanism to bypass the traditional
financial system which led to the aforementioned prices on
account of its laxity in regulations. (Karlstrom, 2014;
Dallyn, 2017)
b. 2nd advocates being the Speculators who saw Bitcoin as an
investment opportunity yielding high returns. ( Bouoiyour
et al., 2015)
c. 3rd advocates or belivers of maket participants being the
financial institutions aimed at the introduction of the
blockchian technology in their respective industry and
thereby offering varied service to the investors like more
secure platforms for investment. (Guo and Liang, 2016;
Patki and Sople, 2020).
 4th wave of crytocurrency currently taking place comprises of
Central Banks an dtheir so called Central bank digital
Currencies (CBDC). (Fernandez- Villaverde et al., 2020).
The world of crypto is revolving super fast and so the
viewpoints of the govenments, regulatory bodies and the
market participants. RBI will issue India’s digital rupee need
‘CBDC’ in the financial year 2022-23, a fiat currency
transacted using wallets and also regulated by the RBI. The
Federal Reserve (FED) is expected to come up with the
policies sprints focused on crptocurrency which would also
provide a roadmap for the future work on crpyptocurrency.
(rbidocs.rbi.org.in).

Amongst the various crpytocurrencies available in the market

a few worth mentioning are bitcoin, ethereum, ripple (XRP),
litecoin, tether, bitcoin cash, libra, monero, EOS, binance
bitcoin etc while others lined up to offer their intitial coin
offerrings. (Grobys and Vahamaa, 2018)

Main concept of Blockchain is to record transactions Blockchain

transactions can be categorised as a process which involves
parties acquire or lose a certain status in order to record new
transactions the hash of the first block of the record should be
forwarded to the minor who employs it and generates a hash of
the second block in introducing a new block into the blocking
and solving the hash is what we have already mention mining or
proof of work (Nakamoto 2008)

The dynamics underlying the price formation of crytocurrency

and the connection of the digital world with their real economic
and financial quanterparts are yet to be distnagled. They can be
distangled by considering the literature by three different
methods :
 a. Econometric
b. Computational
c. Physical
which will act a magnifier and prove that the crypto and real
world are two distinct but interconnected spheres.(Rocco
Caferra, Sentiment Spillover & Price Dynamics)

The studies and the literature available on the crypto currency

market shows that the market behaves differently from other
traditional financial markets such as equity, commodity and
exchange rate. Ethereum has become 2nd to bitcoin in market
capitalisation since 2018 and given its relevance as a smart
contract platform, it will be included in many future research
studies.

Under the guise of rational investment researchers have

identified some factors like size, liquidity risk and idiosyncratic
volatility that will contribute in explaining the cross-section of
expected crypto- currency returns.(liu et al,2022; Zhang and Li,
2020)

Crptocurrency is considered less liquid as compare to their

traditional counterparts due to their:
a. relatively lower market capitalisation
b. concentrated ownership structure and
c. a highly fragmented multiplatform market structure.
(Makarov and Schoar,20121)

Contrary to this the buying and selling of cryptocurrencies

contrary to their recent performance resembles the behaviour of
a market maker, entailing selling cryptocurrencies when the
public is buying (when price increases) and buying when the
public is selling (when price decrease) providing immediate
relief to the less patient investors in the form of returns.

The emerging crypto currency market is inherently different

fromthe conventional asset markets by a number of reasons as
follows:
a. Crypto currencies can be traded on multiple exchanges
simultaneously and 24 x 7 whereas traditional assets are
traded on a single exchange during working days.
b. Tradional markets exchanges match orders based on
centralise book of orders whereas in cryptocurrency
markets there is no “provision to ensure that investors
receive the best price when executing trades” as a
prominent role is played by cross- exchange arbitrage.
(Makarov and Schoa, 2020)
c. The degree of regulation and oversight from authorities
very widely across crypto currencies exchange in contrast
to conventional exchanges.(Hansen, 2018)
d. The conventional markets are dominated by institutional
investors investors as compare to the crypto currency
market which are mainly populated by retail investors.
(Franklin2020, Graffeo,2021)

And hence then it can be argued by the way of literature

studied that crypto currency owners have limited experience
of investment(Xi.et al., 2020) and possess (higher) levels of
financial that is (digital ) literacy than non-owners. (Panos
et,al., 2020).

Bitcoin and Ethereum being the largest largest

cryptocurrencies in terms of market capitalization contribute
to the systemic risk of the market along with other
cryptocurrencies which unike their declining prices also
contribute to the systemic risk in the market.(Ming Yuan,
Zhen Wu,Xin Wu, Risk Diffusuon)

Cryptocurrencies experienced a market capitalisation of USD

1.9 9 trillion in 2022 compared to USD 302 billion in 2019.
(coinmarketcap.com/charts). The isolated features of crypto
currencies from the traditional financial assets differ in the
following way:
a. ten times higher volatility then conventional
assets(Bariviera & Merediz Sola-2021)
b. Continuous trading and trading with anonymity (Yue et
al., 2019)
c. Substantial potential of vulnerability to manipulation
(Gandal et al,2018)
d. Speculative Investments (Urquhart, 2018)
e. Dilemma in the forms of trillema problems like disorinted
regulations and policies, increasing cyber crimes, potential
for inherent price bubbles ( Corbet et.al., 2019).

On aacount of all of these unconventional characteristics

cryptocurrencies are regard as ‘Commodity Money’ instead
of a simple speculative instrument. (Rehman & Apergis,
2019) and hence along with this the simplistic nature ,
transparency and growing popularity several developed
economies have formed legislations to establish
cryptocurrencies as a legal form of payment. (Dahir et al.,
2019).

Crypto currencies- one of the most popular investment assets

in the financial market and as Bitcoin offers hedging benefits
against uncertainty shocks in the real economy (Baur and
Demir et al. 2018), but ar also subject to some undesirable
characteristics:
a. Crash Risk (Kalyvas at al. 2020)
b. Sentiment Disagreemnet (Ahn and Kim, 2020)
c. Emotional Trading (Ahn and Kim, 2021)

Irrespective of the insignificant relationship between bitcoin

and the general macroeconomy and all of these undesirable
traits, the institutionalisation of crypto currencies would edge
their way into the traditional financial ecosystem.

The crypto currency market cannot be considered efficient

based on the information available on all cryptocurrencies.
The quality of information in the sphere of crypto currency,
its regulatory implications regarding the working of its
market and its level of relative efficiency will help in shaping
the public confidence and thus verifying the prospects and
challenges in adopting cryptocurrencies by the central banks
and governments.

As an upcoming speculative asset class, are cryptocurrency

returns predictable according to its relative market risk
premia?

Are crypto assets risky investments for which the investors

must be rewarded, if hold ?

A solution to distributed computing problem

Satoshi Nakamoto’s invention is a practical solution to a

previously unsolved problem in distributed computing known
as ‘Byzantine General’s Problem’, consisting of trial on
agreement on a course of action by exchanging information
over an unreliable and potentially compromised network. His
solution uses the concept of Proof-of-work to achieve
consensus without a central trusted authority representing a
break a major milestone in distributed computing science and
has wide applicability beyond Currency. iIt can also be used
to achieve consensus on decentralized networks for - fair
elections, lotteries, asset registries, digital notarization and
more. (Andreas M. Antonopoulou, Mastering Bitcoin, pg4)

Future of crypto currency and currencies as a whole

The future of cryptographic currencies is even brighter then

the future of bitcoin. Bitcoin introduced a completely new
form of decentralised organisation and consensus spanning
hundreds of incredible innovations, which would likely effect
brought sectors of economy from distributed system science,
to finance, economies, currencies, central banking, and
corporate governance. Blockchain and the consensus system
will significantly reduce the cost of organisation and
coordination on large-scale systems while removing
opportunities for concentration of power, corruption and
regulatory capture. (A.M. Antopoulou, Mastering Bitcoin,
pg.233).

References

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Satoshi Nakamoto, satoshi@gmx.com., bitocin.org.
MakotoYano, Chris Dai, Kenichi Masuda, Yoshio Kishimoto,
Blockchain and Cryptocurrency, 2020, Singapore, Springer,
2020, 14p.
Andreas M. Antonopoulos, Mastering Bitcoin,6th rev, edi.,
USA, O’Reilly Media, CA, 2020, 4 & 233p.
Ahmed A Elngar, Sandeep P Kumar Panda, Valentina Emilia
Balas, Bitcoin and Blockchain. History and Current
Applications, 2020,Uttarakhand, India, CRC Press. 2020, 22-
24p.
Arvind narayan, joseph Bonneau, Edward Felten , Andrew
Miller, Steven Goldfeder,preface Jeremy Clark, Bitcoin and
Cryptocurrency Technologies, 2016, Princeton ,8-13p.
Marcus De Maria, Profiting from Cryptocurrencies, 2020, 13-
15p
Greshma Francis, (2020) A study on growth and future
prospectus of Cryptocurrency in global market, Banglore
North University, Bangalore, IJSDR2003056.
Malcolm Cambell- Verduyn, Bitcoin and Beyond, 2018,
Routledge, New York, 4 pg.
Yasar Kaya (2018). Analysis of Crytocurrency Market and
Drivers of the Bitcoin Price, Master of Science Thesis, KTH
Industrial Engg.& Mgt., 1-2.
Kiana Danial, Cryptocurrency Investing for Dummies, 2019,
Hoboken, NJ., John Wiley and Sons, Inc., 21 pg.
Anil Kumar V.V., & Swathy, (2019), A study on
opportunities & challenges of crptocurrency in India with
special reference to bitcoin, ijrar.E ISSN -1269
Jonathan Chiu amd Thorsten Koeppl. (2019), The Economics
of Cryptocurrencies- Bitcoin and Beyond, bank of Canada
Staff Working Paper 2019-40, ISSN 1701-9397
Rocco Caferra, Sentiment Spillover and Price Dynamics:
Information flow in the cryptocurrency and Stock market,
2022, Dept. of Economics, Italyj.physa.2022.126983.
Thanakorn Nitithumbundit, Jennifer S.K. Chan, Covid- 19
impact on Cryptocurrencies market using MultivariateTime
Series Models, 2006, School of Maths. &Stats., Australia,
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Explaining Cryptocurrency Returns: A prospect theory
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Kwamie Dunbar & J. Owusu-Amoako, (2022),
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review of financial Ananlysis, Boston & Jackson, USA S2
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Isamil O Fasanya, Oluwatomisin J. Oyewole, Johnson A.
Oliyide, (2022), Investor’s sentiments and the dynamic
connectedness between cryptocurrency and precious metals
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frequency dynamics of connectedness between
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(2022), Trding Volume and liquidity in crpytocurrency
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Ming-Yuan Yang, Zhen-Guo Wu, Xin Wu, (2022), An
emprical study of risk diffusion in the cryptocurrency market
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(2021), The link between cryptocurrencies and Google trends
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Use a password generator

Multibit automatically creates a wallet and a new bitcoin

address for alice by clicking the request tab.
Currency where can buy and sell bitcoins in exchange for a local
currency. Thesee operate as web based currency markets and
include:
Bitstamp (bitstamp.net) European currency market that
supports several currencies including euros and US dollars via
wire transfer.
Coinbase (coinbase.com) US Based Bitcoin wallet and
platform where merchants and consumers cans transact in
bitcoin, makes it easy to buy and sell bitcoins, allowing users to
connect to US checking accounts via the ACH system

Bitcoincharts.com, a market data listing service that shows the

market rate of bitocin across many exchanges around the globe
denominated in different local currencies.
Bitcoinaverage.com, a site that provides a simple view of the
volume-weighted average for each currency.
ZeroBlock, a free Android and iOS application that can display
a bitcoin price from differnet exhchanges.
bitcoinwisdom.com, another data listing service.
Unconfirmed – this emans that tne transaction has been
propagated to the network but has not yet been inclusded in the
bitcoin transaxtion ledger aka, block chain, the transaction must
be picked-up by a miner and included in a block of transactions,
once a new block is created in approximately 10 mins the
transactions within the block will be accepted as confirmed by
the network and can be spent. The tarnsaction is seen by all
instantly but it is only trusted by all when its is included in
anewly mined block.
Popular blockchain explorers include:
 Blockchain.info
 Blockexplorer.com
 Insight.bitpay.com
 Blockr.io
Transactions move value from transactions inputs to
transactions outputs. An input is where the value is coming
from, usually a previous transaction output assigns a new owner
to the value by associating it with a key. The destination key is
called an encumbrance. It imposes a requirement for a signature
for the funds to be redeemed in future transactions. Outputs
from one transaction can be used as inputs in a new transaction,
thus creating a chain of ownership as the value is moved from
address to address.

There’s a smart card and there’s a wallet unit, each certificate

essentially fixes the entire history of documents and certificates
up intil that point. Then collectively the aprcipants can ensure
that the history cannot be changed afetr the fact.in particul;ar the
relative ordering of documents is preserved.

To create a certificate for a document the timestamp server

includes a hash pointer to the previous document’s certificate,
the current time, and signs these three data elements together.

Certain aspects cyperhunk movement were concerned about

implimenting ecash systems due to these patents. Cyperhunks
mailing list proposed that a group of anonymous coders
implement ecash so that if someone were to sue, they would’nt
be able to find the coders. While it is difficult to think that
Bitcoin could violate.
Python text blob used to assign polarity values to individual
blogs, textblog being a Python library built on top of NLTK. It
offers a variety of features like pos-tagging, sentiment analysis
noun phrase extraction, etc. The weight for the blocks were
assigned as:
1. Highly negative (N+) = -2
2. Negative (N-) = -1
3. Neutral (N) = 0
4. Positive (P) = +1
5. Highly Positive (P) = +2
(S. Ranjan, S.Sood, Investor Community Sentiment Analysis)
Introduction
Predictive power of sentiment may not be able to separately
identify the price change as a correction pattern for a miss
pricing or adjustment dynamic in relation to the regime
switching stock fundamentals. (San Lin Chung and Chung Ying
Yeh).
A whole new industry has emerged around the financial market
sentiment detection. In the beginning, research on stock market
prediction was based on Effiecient Market Hypothesis and
random walk theory. In EMH, new information i.e. news has a
major impact on stock prices then past stock market prices.
Since news are not predictable, the stock market will follow a
random walk pattern.
Classical theory of finance based which on the efficient market
hypothesis (EMH) assuming investors as rational risk averse
who make the market informationally efficient in which the
asset returns are unpredictable, whereas the behavioural science
theory proclaims ‘noise traders’ as irrational arbitrators- driving
the price away from the Intrinsic values or fundamentals.
Noise traders in the financial market act on noisy signals,
driving the systematic and unsystematic risk at an equilibrium
position (theoretical framework of “noise”, Black, 1986).
If investors trade on noisy signals unrelated to market
fundamentals asset prices will divert away from the intrinsic
value suggested by DSSW theory of De Long, Shleifer,
Summers, and Waldmann (1990). The DSSW theory also
explains why noise traders risk and it also states that in the long
run prices will revertto the fundamentals even if the process is
long.
Delong et al. (1990) define sentiment as the component of
expectations about the asset results that are not warranted by
Consumers confidence index is a proxy for investor sentiment.
Ho hung (2009), Schmeilng (2009), Akhtar et al. (2011),
Zouaoui et al (2011), states the proxy sentiment with consumer
confidence. To this Fisher and Statman (2002), states that
though investor sentiment and consumers sentiment or not the
same there is a significant and positive relationship amongst
them. The relationship between consumers confidence and stock
market is to find out whether there is a strong relationship
during the concerning period.
Schliefer (2003) denotes that estimation of stock price is flexible
when the investor sentiment is taken into account with limited
arbitrage fundamentals.
Stock prices on average under-react to earning surprises (post-
earnings announcement drift), and over react to operating
accruals component of earnings. Accruals and earnings related
patterns of return predictability are referred to as ‘anomalies,
‘under-‘ and ‘over-reactions’ or as reflecting investor
‘optimism’, ‘pessimism,’ or naivet’e’. these labels offer some
guidance as to whether the source of these effects. A procedure
for conjecturing a separate psychological bias for each
miscreation pattern creates a problem for model overfitting;
explanatory power is bought at the expense of predicting power.
(David Hirshleifer, Sonya S. Lim & Siew Hong Teoh, Limited
Investstor Attention)
Parsimonious explanation from both wonder in overreactions to
earnings and earning components is offered by limited attention.
The model of limited attention is consistent with post-earnings
announcement drift, the accural anomaly, the cash flow
anomaly, and the profit anomaly.
Investor sentiment, the behavioural component in asset price
volatility, is broadly defined as a belief that the future cash
flows and investments, is unjustified by the facts at hand (Baker
& Wurgler 2006, 2007). The force that drives asset prices to the
levels which are not supported by fundamentals or intrinsic
value is the impulse of investor sentiment by irrational
exuberance or unsustainable investor enthusiasm.
Investor sentiment induces anecdotal market movement,
representativeness,conservatism and intuitively affects the return
volatility through spontaneous shocks in demand shift, (Brown,
1999;Shleifer & Vushney,1997).
Investor Sentiment affects the stock price by changing the
required rate of return and the expected earning growth. For the
required rate of return, the sentiment effect during pessimistic
period is evidently different from that when the sentiment is
colrelatively high. Investor sentiment has also an asymmetric
effect on stock price and receives more importance for stocks
with high information uncertanities whereas accounting
information is reliable for stocks with stable earnings.
The effects of different state of sentiments- positive and
negative changes, on market access returnes are examined by
augmenting the central sentiment change in the conditional
volatility model similar with Lee et al (2002), Qiang and Shu-e
(2009), and Chuang et al. (2010) and Perez-Liston et al. (2014).
Bennet et al.(2012), Dash and Mahakud (2012, 2013a, 2013b),
and Chandra and Thenmozhi (2013) used Indian data to
examine the impact of investor sentiment, primararily dealing
with one part of the analysis being the overall impact of investor
sentiment on stock returns and the role of different states of
investor sentiment, if any, in generating market volatility was
neglected.
The investigation in the context of emerging market economy
by providing more ideas about the market behaviour and how a
set of investors i.e. the noise traders with the different states of
investor,sentiment affect market access return. This would
enable us to know that the biases in stock market forecast of
investors and it also teaches us about the opportunities to earn
extra returns by exploiting those biases, (Fisher and
Statman,2000).
The various empirical findings of studies conducted our:
a. The effect of sentiments on predicting the cross-section of
future stock returns are conditional on the state of regime
i.e. magnitude of coefficient estimates associated with
sentiment increases while the regiments are controlled.
b. After the conditioning on sentiment and regimes dividend
and earning oriented portfolios perform strong conditional
predictability patterns.
c. Value affects and size of the appearance are also
conditional on sentiment and state of the regime.
d. The cross-section predictability patterns associated with
sentiment reflect the mis-pricing, not the compensation
for systematic risk.
Many researchers are of agreement that investor senitment
are economically significant: as the concept is still very
cryptic and abstract. Inavestor Sentiment can be said as the
belief about the furture cash flows and investment risks
which are unjustifiable by the present facts.
As per the traditional finance theory, accounting information
reflects the profitability as well as the quality of the assets,
which can be used to forecast equity prices. The investors, if
irrational, their psychological factors or cognitive bias could
affect their investment decisions. The stock price variation
not only relies on the intrinsic value represented by the
accounting information but also on the investors irrational
behaviours, measured by investor sentiment. Investor
sentiment derived from incorrect subjective beliefs or
unrelated information that asset value, may lead to falls
market anticipation and fuel market volatility.
Chen (2011) developed a framework to explain the sentiment
effects and found that investor sentiment can affect the value
relevance of accounting information. Sentiment could affect
the predicted earnings growth as investors usually have an
optimistic attitude towards the future during the high
sentiment period whereas stock analysts tend to issue higher
ratings for those hard -to -value stocks.(Corner et al.,2014).
Individuals decide the level of attention by balancing out
the cost of attention against the expected benefits. In
equilibrium some investors may decide not to attend to the
implications of public information about earnings or its
components explaining the phenomenon: Why inattentive
investors who trade based upon their inattentive
expectations rather than simply remaining on the sidelines
can survive in the long run. (Hershleifer, Sonya S.S. ,
S.H.Teoh)
There are three types of investors:
a. that ignore all current earnings related information
b. attend only a subset of that information
c. attend all of that information that is publicly available.
All investors being ex-ante identical and differences in how
much of the public information set they process depends
upon the cost they have to incur to obtain information.
Assuming that in an attentive investors apart from the
specific signals that ignore update believe as rational
Bayesians.
There are 2 dates:
At date 1, cash flow C1, accurals a1, and earnings E1= c1+a1
are realised.
Investors update their prior beliefs based upon whatever
public signals they observe.
At date 2, terminal earnings, cash flow, and accruals, e2,c2
and a2, are realised ,where e2= c2+a2, and the firm is
liquidated.
 In general, accounting accrual must reverse out, so we
assume that a2=-a1 (Sonya, David Hirsheifer, and S.H.Teoh).

Literature Review
Otto (1999) was the 1st to examine the relationship between
equity prices and consumers confidence by using the monthly
data of Wilshire 5000 stock index from June 1980 to June 1999.
The Granger causality test of Otto indicates that stock price
consumers confidence is affected bt the movements in the stock
price but the lagged changes in confidence have no explanatory
power for stock prices.
In 1961, Graham (1973), Malkiel (1990) and Brown (1991), was
characterised by a high demand for small, young growth stocks,
where Malkiel writes of a “new-issue mania” that was
concentrated on new “tronics” firms. “… The Tronics boom
came back to earth in 1962. The tail spin started early in the year
and exploded in the horrendous selling wave… Growth stocks
took the brunt of the decline, falling much further than the
general market” (p.54-57)
The stock returns and consumers confidence are correlated in
countries where stock ownership is high such as UK and also
the stock returns impact consumers confidence at very short
horizons for two weeks or one month, (Jansen and Nahuis,
2003). Brown and Cliff extend the study of Otto (1999) and
Jansen and Nahuis(2003), indiacting indicating a perfect
positive relationship between consumers sentiment and market
returns.
The VAR analysis carried out by them reveals that market
returns predict future sentiment and sentiment predicts market
returns, but with little evidence. They also grouped the investor
sentiments: as
1. Individual Sentiment affecting samll stocks and
2. Institutional investor sentiment affecting large stocks.
Bremmer (2008) examine the the relationship between the
consumers confidence and the most common stock indices such
as Dow Jones, S&P 500 and NASDAQ and also apply co-
integration test to measure the long-run relationship. He states
that the expected changes in consumers confidence have no
impact on stock prices whereas unexpected changes are related
to changes in stock prices.
Spyrou (2012) after examining the relationship between the
monthly returns of US stock portfolio formed on book-to-market
equity (B/M), long-term reversals, momentum and size for a
period ranging 1965-2007 finds that’s contemporaneous returns
are significantly related to monthly sentiment changes and tend
to be on the higher side during periods of negative sentiment.
He also states that the stock returns are more important in
predicting sentiment changes and vice versa and that the
conditional return volatility is significantly affected by lagged
volatility rather than the sentiment changes.

Among few studies that argue that consumers confidence predict

stock returns is Fisher and Statman (2003) who examine the
relationship between consumers confidence measured by the
Michigan’s CCI and Conference Board CCI and S&P 500,
NASDAQ and small cap stock returns,indicating that consumers
confidence predicts the stock returns and they also find a
positive relationship for high stock returns indicating that the
high returns boost the consumer confidence.
Baker and wurgler (2007) finds that the both global and local
sentiment predicts the market returns as well as the relative
returns for the small highly volatile distressed and growth
portfolios for major stock markets.
Scmeling (2009), states that sentiment negatively forecast
expected returns on average across countries, which holds for
returns of value stocks, growth stocks, small stocks and for
different forecasting horizons. They also find that the impact of
sentiments on returns is stronger for countries which have less
developed market institutions and for countries that are
culturally more prone to investor overreaction.
Chen (2011) is the first study which examines the asymmetric
effects of negative sentiment during market fluctuations. He
uses monthly returns of S&P 500 Price Index by using Markov-
Regime switching model and results support the asymmetric
effect which reveals the impact that is greater in bear market. He
also finds that greater the market pessimism the higher is the
probability of switching from a bull to a bear market.
Most prior studies documented that investor sentiment would
affect price combined with accounting information and also
indicate the heterogeneity of the sentiment effect. Whereas the
existing literature rarely provides the basis for the mechanism
behind the effect of sentiment and accounting information and
also which explains the cross-section difference of this
mechanism.
The above stated anecdotes suggest some regular patterns in the
effect of investor sentiment on the cross-section. Canonical
extreme growth stocks seem to be specially prone to bubbles
and subsequent crashes, consistent with observation that they
are more appealing to speculators and optimists and at the same
time hard to arbitrage.
A notable exception to this, was the “nifty fifty” bubble, but the
anecdotal accounts suggest that this bubble occurred during a
period of broadly low sentiment, so that it may be still consistent
with the cross-sectional prediction that an increase in sentiment
increases the relative price of those stocks that are the most
subjective to value and the hardest to arbitrage.
The persistence of the relationship between sentiment index and
the volatility of the stock markets suggest that investor
sentiment in India plays a significant role in determining the
stock market volatility (Journal of Asia Pacific Business,pg177).
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