The Long of It: Odds That Investor Sentiment Spuriously Predicts Anomaly Returns
Robert F. Stambaugh
University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)
University of Minnesota
Shanghai Advanced Institute of Finance; University of Pennsylvania - Wharton Financial Institutions Center
February 16, 2014
Journal of Financial Economics (JFE) 114, December 2014, pp 613-619.
Extremely long odds accompany the chance that spurious-regression bias accounts for investor sentiment's observed role in stock-return anomalies. We replace investor sentiment with a simulated persistent series in regressions reported by Stambaugh, Yu and Yuan (2012), who find higher long-short anomaly profits following high sentiment, due entirely to the short leg. Among 200 million simulated regressors, we find none that support those conclusions as strongly as investor sentiment. The key is consistency across anomalies. Obtaining just the predicted signs for the regression coefficients across the 11 anomalies examined in the above study occurs only once for every 43 simulated regressors.
Number of Pages in PDF File: 15
Keywords: investor sentiment, anomalies, spurious regressors
JEL Classification: G12, G14, C18
Date posted: July 11, 2012 ; Last revised: November 6, 2014