Persistence of Investor Sentiment in the Past 50 Years: A Behavioural Perspective
Posted: 3 Dec 2018
Date Written: November 26, 2018
We investigate changes in market sentiment using structural break analysis over a 50-year period. Investor sentiment behaved like a trending, non-stationary time series from 1965 to 2001, a period associated with numerous bubbles and crashes in the stock market. In the more recent post-2001 period, sentiment has been substantially more mean reverting, implying lower persistence from noise investors and lower associated mispricing. We explore how these changes in sentiment persistence affect well-documented equity anomalies, and assess the predictive power of sentiment on short-run returns when regime changes are considered. Our findings suggest that the presence of sentiment-driven investors and their market impact is significantly time-variant.
Keywords: Market Sentiment, Structural Breaks, Equity Anomalies, Sentiment Predictability, Arbitrage
JEL Classification: G12, G14
Suggested Citation: Suggested Citation