Investor sentiment in the equity market and investments in corporate-bond funds

• Published in: International review of financial analysis 2021-11, Vol.78, p.101898, Article 101898
• Main Author: Islam, Mohd. Anisul
• Format: Article
• Language: English
• Subjects: Corporate-bond fund; Flight-to-quality; Fund performance; Investor sentiment; Sentiment beta
• ISSN: 1057-5219; 1873-8079
• DOI: 10.1016/j.irfa.2021.101898

This study explores the relation between investor sentiment in equity market and investments in corporate-bond funds. Investors tend to move into and out of corporate-bond funds when contemporaneous sentiment in equity market differs from the historical average. Specifically, a one-standard-deviation decrease in equity-market sentiment generates 0.1% and 0.4% inflows for active and index funds, respectively. It reflects the time-varying flight-to-safety behavior of investors. Besides, funds with low exposure to equity-market sentiment appear to attract inflows and funds with high exposure to equity-market sentiment experience outflows, indicating that investors are likely to avoid sentiment risk. Morever, the result shows that funds with the highest negative sentiment exposure significantly outperform the funds with the highest positive sentiment exposure by 2.22%–2.52% per annum. The results are robust to using alternative sentiment metrics and considering different subperiods. •Investor flows and performance of corporate-bond funds are sensitive to investor sentiment in the equity market.•Sample consists of 4,378 US open-end corporate-bond funds from January 1989 to December 2018.•Low(high) equity-market sentiment drives flow into(out of) the corporate-bond funds.•Corporate-bond fund flows are negatively influenced by fund exposure to equity-market sentiment.•Corporate-bond funds with low or negative sentiment exposure outperform the funds with high or positive sentiment exposure.