The Asymmetric Effects of Investor Sentiment

40 Pages Posted: 8 May 2012 Last revised: 8 Nov 2016

See all articles by Chandler Lutz

Chandler Lutz

Securities and Exchange Commission

Date Written: October 14, 2013


We use the returns on lottery-like stocks to construct a novel index for investor sentiment in the stock market. This new measure is closely related to previously developed sentiment indicators, but more accurately tracks speculative episodes over the sample period. Using our index, we find that the relationship between sentiment and returns is asymmetric: during bear markets, high sentiment predicts low future returns for the cross-section of speculative stocks and the market overall while the relationship during bull markets is weak and often insignificant. Thus, the results suggest that sophisticated investors only act as corrective force during certain time periods. We also show that our index predicts implied volatility, media pessimism, and mutual fund flows. Overall, our findings are consistent with both the theories and anecdotal accounts of investor sentiment in the stock market.

Keywords: investor sentiment

JEL Classification: C22, C53, G11, G12, G17

Suggested Citation

Lutz, Chandler, The Asymmetric Effects of Investor Sentiment (October 14, 2013). Macroeconomic Dynamics, Vol. 20(6), No. 1477-1503, 2016, Available at SSRN: or

Chandler Lutz (Contact Author)

Securities and Exchange Commission ( email )

100 F Street, NE
Washington, DC 20549
United States

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