Investor Sentiment and Momentum and Contrarian Trading Strategies: Mutual Fund Evidence

52 Pages Posted: 17 Aug 2011

See all articles by Grant Cullen

Grant Cullen

Murdoch University

Dominic Gasbarro

Murdoch University

Gary S. Monroe

University of New South Wales (UNSW) - Australian School of Business

J. Kenton Zumwalt

Colorado State University, Fort Collins - Department of Finance & Real Estate

Date Written: August 16, 2011

Abstract

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.

Keywords: Investor sentiment, Momentum, Contrarian, Mutual fund

JEL Classification: G2, G11, G14, G23

Suggested Citation

Cullen, Grant Stewart and Gasbarro, Dominic and Monroe, Gary S. and Zumwalt, J. Kenton, Investor Sentiment and Momentum and Contrarian Trading Strategies: Mutual Fund Evidence (August 16, 2011). 24th Australasian Finance and Banking Conference 2011 Paper. Available at SSRN: https://ssrn.com/abstract=1911010 or http://dx.doi.org/10.2139/ssrn.1911010

Grant Stewart Cullen

Murdoch University ( email )

Murdoch, WA 6150
Australia
618 9360 6026 (Phone)
618 9310 5004 (Fax)

Dominic Gasbarro

Murdoch University ( email )

South Street
Murdoch 6150, Western Australia
Australia

Gary S. Monroe (Contact Author)

University of New South Wales (UNSW) - Australian School of Business ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia
+61293856443 (Phone)

J. Kenton Zumwalt

Colorado State University, Fort Collins - Department of Finance & Real Estate ( email )

Fort Collins, CO 80523
United States

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