Small-Investor Sentiment, Differences of Opinion and Stock Overvaluation

48 Pages Posted: 7 Feb 2013 Last revised: 17 Mar 2014

Date Written: March 13, 2013

Abstract

Recent research shows that small trade imbalances are negatively associated with future stock returns. I find that this negative association only exists when stocks have initially been mispriced. In addition, mispricing occurs before the sentimental trading of small investors. In stocks with high opinion divergence, buying pressure from small investors deters the realization of negative information. Therefore, trades from retail investors do not directly cause mispricing, but they prevent price discovery and facilitate mispricing.

Keywords: Small-trade imbalances, Mispricing, Noise trader risk

JEL Classification: G11, G14

Suggested Citation

Qian, Xiaolin, Small-Investor Sentiment, Differences of Opinion and Stock Overvaluation (March 13, 2013). Journal of Financial Markets, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2212659 or http://dx.doi.org/10.2139/ssrn.2212659

Xiaolin Qian (Contact Author)

Eastspring Investment ( email )

10 Marina Boulevard, #32-01
Marina Bay Financial Centre Tower 2
Singapore, 018983
Singapore
018983 (Fax)

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