Investor Sentiment and Momentum and Contrarian Trading Strategies: Mutual Fund Evidence
Grant E. Cullen
affiliation not provided to SSRN
Gary S. Monroe
University of New South Wales (UNSW) - Australian School of Business
J. Kenton Zumwalt
Colorado State University - Department of Finance & Real Estate
August 16, 2011
24th Australasian Finance and Banking Conference 2011 Paper
Stocks with high sentiment betas are more sensitive to investor sentiment, with more subjective valuations. We contend that sentiment beta also captures the duration of mispricing. Accordingly, stocks with high (low) sentiment betas provide opportunities for momentum (contrarian) traders. We form hypothetical zero investment portfolios of high (low) sentiment betas stocks, and show that momentum profits decompose to reveal positive (negative) serial correlation of idiosyncratic returns, that contribute to momentum (contrarian) profits. Furthermore, actual mutual funds identified as momentum (contrarian) traders hold stocks with higher (lower) sentiment betas. Additionally, funds adjust sentiment betas to enhance performance as sentiment changes.
Number of Pages in PDF File: 52
Keywords: Investor sentiment, Momentum, Contrarian, Mutual fund
JEL Classification: G2, G11, G14, G23working papers series
Date posted: August 17, 2011
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