89 Pages Posted: 2 Nov 2017 Last revised: 7 Nov 2019
Date Written: November 5, 2019
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: Suggested Citation