Speculation Sentiment

89 Pages Posted: 2 Nov 2017 Last revised: 7 Nov 2019

See all articles by Shaun Davies

Shaun Davies

University of Colorado at Boulder - Leeds School of Business

Date Written: November 5, 2019

Abstract

I exploit a novel setting to measure disagreement between unsophisticated speculators and "smart" money, that is, the leveraged exchanged-traded funds' (ETFs) primary market. The leveraged ETFs' primary market provides observable arbitrage activity that originates from unobservable speculative demand shocks that create relative mispricing between a leveraged ETF and its underlying derivative securities. I form the Speculation Sentiment Index using the realized arbitrage trades and the index proxies for the direction and magnitude of market-wide speculative demand shocks. The Speculation Sentiment Index predicts aggregate asset returns, anomaly returns, and it is associated with market-wide mispricing and arbitrage activity.

Keywords: investor sentiment, non-fundamental demand, return predictability, leveraged exchange-traded fund

JEL Classification: G02, G12, G14

Suggested Citation

Davies, Shaun, Speculation Sentiment (November 5, 2019). Available at SSRN: https://ssrn.com/abstract=3063551 or http://dx.doi.org/10.2139/ssrn.3063551

Shaun Davies (Contact Author)

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

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