The Behaviour of Sentiment-Induced Share Returns: Measurement When Fundamentals are Observable

35 Pages Posted: 8 Jul 2014

See all articles by Richard A. Brealey

Richard A. Brealey

London Business School

Ian A. Cooper

London Business School

Evi Kaplanis

London Business School

Date Written: July 7, 2014

Abstract

We test the effect of sentiment on returns using a sample of upstream oil stocks where we have a good proxy for fundamental value. For this sample, the influence of sentiment is highly time-varying, appearing only after the post-2000 increased interest in oil-related assets. Contrary to the hard-to-arbitrage hypothesis, sentiment affects returns on these stocks principally through their fundamentals rather than through deviations from fundamentals. Retail investor sentiment predicts short-term momentum of fundamentals and Baker-Wurgler sentiment predicts mean reversion of fundamental factors. These effects appear in a portfolio that is long hard-to-arbitrage stocks and short easy-to-arbitrage stocks, but only because this portfolio has net exposure to fundamentals.

Keywords: investor sentiment, return predictability, arbitrage

JEL Classification: G11, G12, G14

Suggested Citation

Brealey, Richard A. and Cooper, Ian Anthony and Kaplanis, Evi, The Behaviour of Sentiment-Induced Share Returns: Measurement When Fundamentals are Observable (July 7, 2014). Available at SSRN: https://ssrn.com/abstract=2463113 or http://dx.doi.org/10.2139/ssrn.2463113

Richard A. Brealey

London Business School ( email )

Sussex Place
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London, London NW1 4SA
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+44 207 262 5050 Ext. 3462 (Phone)
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Ian Anthony Cooper (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
+44 171 262 5050 (Phone)

Evi Kaplanis

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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