Investor Sentiment and Asset Pricing in Public and Private Markets
Posted: 1 Dec 2010
Date Written: November 29, 2010
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: Suggested Citation