Market Response to Investor Sentiment
University of Bonn - The Bonn Graduate School of Economics
University of Mannheim - Finance Area
University of Mannheim - Finance Area; Center for Financial Studies (CFS); Goethe University Frankfurt - Research Center SAFE
May 3, 2010
Recent empirical research suggests that measures of investor sentiment have predictive power for future stock returns over the intermediate and long term. Given the widespread publication of sentiment indicators, smart investors should trade on the information conveyed by such indicators and thus trigger an immediate market response to their publication. The present paper is the first to empirically analyze whether an immediate response can be identified from the data. We use survey-based sentiment indicators from two countries (Germany and the US). Consistent with previous research we find there is predictability at intermediate time horizons. For the US, however, the predictability all but disappears after 1994. Using event study methodology we find that the publication of sentiment indicators affects market returns. The sign of the immediate response is the same as that of the predictability over the intermediate term. This finding is consistent with the idea that sentiment is related to mispricing, but is inconsistent with the idea that the sentiment indicator provides information about future expected returns.
Number of Pages in PDF File: 26
Keywords: Investor Sentiment, Event Study, Return Predictability
JEL Classification: G12, G14
Date posted: February 16, 2009 ; Last revised: May 4, 2010
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