The Behaviour of Sentiment-Induced Share Returns: Measurement When Fundamentals are Observable
35 Pages Posted: 8 Jul 2014
Date Written: July 7, 2014
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: Suggested Citation