Investor Sentiment, Disagreement, and Breadth-Return Relationship

Management Science, 2013, 59(5), 1076-1091

58 Pages Posted: 22 Jan 2011 Last revised: 6 Jun 2013

See all articles by Ling Cen

Ling Cen

The Chinese University of Hong Kong

Hai Lu

University of Toronto - Rotman School of Management

Liyan Yang

University of Toronto - Rotman School of Management

Date Written: July 21, 2012

Abstract

We extend the theory and empirics in Chen, Hong, and Stein (2002) by assuming that investors subject to market sentiment hold a biased belief in the aggregate. With a dynamic multi-asset model, we predict that the breadth-return relationship can be either positive or negative depending on the relative strength of two offsetting forces — disagreement and sentiment. Using the sentiment index developed in Baker and Wurgler (2006, 2007), we find evidence consistent with our predictions. The breadth-return relationship is positive when the sentiment effect is small. However, the relationship becomes negative when (i) the time-series variation of market-wide sentiment is high and (ii) the cross-sectional dispersion of firm-specific exposure to market-wide sentiment variation is large. Our unified framework reconciles a few seemingly inconsistent empirical studies in this literature and explains puzzling cross-sectional return patterns observed during the Internet bubble and the subprime crisis periods.

Keywords: investor sentiment, disagreement, breadth of ownership, cross-sectional stock returns

JEL Classification: G12, G14

Suggested Citation

Cen, Ling and Lu, Hai and Yang, Liyan, Investor Sentiment, Disagreement, and Breadth-Return Relationship (July 21, 2012). Management Science, 2013, 59(5), 1076-1091. Available at SSRN: https://ssrn.com/abstract=1743848 or http://dx.doi.org/10.2139/ssrn.1743848

Ling Cen (Contact Author)

The Chinese University of Hong Kong ( email )

CYT Building
Sha Tin
Hong Kong, Hong Kong
Hong Kong

HOME PAGE: http:///sites.google.com/site/cenling/

Hai Lu

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Liyan Yang

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
674
Abstract Views
3,943
rank
41,210
PlumX Metrics