Investor Sentiment and Short-Term Returns for Size-Adjusted Value and Growth Portfolios

The Journal of Behavioral Finance, 16: 81-93, 2015; DOI:10.1080/15427560.2015.1000329

Posted: 19 Apr 2015 Last revised: 11 Nov 2017

See all articles by Doug Waggle

Doug Waggle

University of West Florida

Pankaj Agrrawal

University of Maine

Date Written: March 17, 2015

Abstract

We examine the sentiment levels of individual investors relative to subsequent short-term market returns for 1992-2010. We find that sentiment, proxied by percentage of investors who are “bullish” on the market, is significantly negatively related to the subsequent three- and six-month performance of the market. The negative relationship is consistent with the contrarian notion of sentiment. In other words, high (low) levels of bullishness tend to be followed by subsequent low (high) returns. This is true even with the inclusion of standard control explanatory variables (Fama-French [1993]). While the significant results hold for the overall market, they are clearly driven by growth, rather than value stocks. Contrary to some earlier studies, we also note significant explanatory power for sentiment when looking at returns of small-, mid-, and large-cap growth stocks. We also noted that the long-term moving average of monthly bullishness increased from 33.3% to 39.0% over the last 18 years. In our study period, about 5% of the total sentiment observations are above 56% (very bullish) and about 5% are below 27% (quite bearish). Finally, we find some strength in the lagged auto-correlation structure for the sentiment variable that lasts for just about three to nine months.

Keywords: Investor sentiment, Bullish returns behavioral, Value growth behavioral, behavioural finance, Lagged autocorrelation, Size capitalization

JEL Classification: G00

Suggested Citation

Waggle, Doug and Agrrawal, Pankaj, Investor Sentiment and Short-Term Returns for Size-Adjusted Value and Growth Portfolios (March 17, 2015). The Journal of Behavioral Finance, 16: 81-93, 2015; DOI:10.1080/15427560.2015.1000329 , Available at SSRN: https://ssrn.com/abstract=2595988

Doug Waggle

University of West Florida ( email )

11000 University Parkway
Pensacola, FL 32514-5750
United States

Pankaj Agrrawal (Contact Author)

University of Maine ( email )

Orono, ME 04469
United States

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