Investor Sentiment, Limits to Arbitrage and Private Market Returns

47 Pages Posted: 28 Aug 2014

See all articles by David C. Ling

David C. Ling

University of Florida - Warrington College of Business Administration

Andy Naranjo

University of Florida - Warrington College of Business Administration

Benjamin Scheick

Villanova University - Department of Finance

Date Written: Fall 2014

Abstract

This article examines the relation between investor sentiment and returns in private markets. Relative to more liquid public markets, private investment markets exhibit significant limits to arbitrage that restrict an investor's ability to counteract mispricing. Using vector autoregressive models, we find a positive and economically significant relation between investor sentiment and subsequent private market returns. We provide further long‐horizon regression evidence suggesting that private commercial real estate markets are susceptible to prolonged periods of sentiment‐induced mispricing as the inability to short‐sell in periods of overvaluation and restricted access to credit in periods of undervaluation prevents arbitrageurs from entering the market.

Suggested Citation

Ling, David Curtis and Naranjo, Andy and Scheick, Benjamin, Investor Sentiment, Limits to Arbitrage and Private Market Returns (Fall 2014). Real Estate Economics, Vol. 42, Issue 3, pp. 531-577, 2014, Available at SSRN: https://ssrn.com/abstract=2488249 or http://dx.doi.org/10.1111/1540-6229.12037

David Curtis Ling (Contact Author)

University of Florida - Warrington College of Business Administration ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
352-392-9307 (Phone)
352-392-0301 (Fax)

Andy Naranjo

University of Florida - Warrington College of Business Administration ( email )

P.O. Box 117168
Gainesville, FL 32611-7168
United States
352-392-3781 (Phone)

Benjamin Scheick

Villanova University - Department of Finance ( email )

United States

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