Investor Sentiment and Asset Pricing in Public and Private Markets

Posted: 1 Dec 2010

See all articles by David C. Ling

David C. Ling

University of Florida - Hough Graduate School of Business Administration

Andy Naranjo

University of Florida - Warrington College of Business Administration

Benjamin Scheick

Villanova University - Department of Finance

Date Written: November 29, 2010

Abstract

This paper examines the relation between investor sentiment and returns in public and private markets. We utilize commercial real estate as the testing ground to provide a unique side-by-side comparison of sentiments short- and long-run impact on similar assets that are owned and traded in two distinct investment environments. Using vector autoregressive models to capture the short-run dynamics between returns and investor sentiment, we find a positive relation between investor sentiment and subsequent quarter returns in both public and private real estate markets. The magnitude of this short-run effect is larger in public markets than in private markets, which is consistent with private market investors being better informed and more sophisticated. We further find a negative relation between investor sentiment and subsequent long-horizon public market returns, consistent with prices reverting to their fundamental values over the long-run. In contrast, we find sustained periods of sentiment-induced mispricing in private real estate markets, consistent with greater limits to arbitrage, short-sale constraints, information externalities, and delays in information transmission that characterize these markets.

JEL Classification: G1

Suggested Citation

Ling, David C. and Naranjo, Andy and Scheick, Benjamin, Investor Sentiment and Asset Pricing in Public and Private Markets (November 29, 2010). 46th Annual AREUEA Conference Paper, Available at SSRN: https://ssrn.com/abstract=1717110

David C. Ling (Contact Author)

University of Florida - Hough Graduate School of Business Administration ( email )

PO Box 117165, 201 Stuzin Hall
Gainesville, FL 32610-0496
United States
(352) 392-0153 (Phone)
(352) 392-0301 (Fax)

Andy Naranjo

University of Florida - Warrington College of Business Administration ( email )

P.O. Box 117168
Gainesville, FL 32611-7168
United States
352-392-3781 (Phone)

Benjamin Scheick

Villanova University - Department of Finance ( email )

United States

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