Aggregate Investor Sentiment and Stock Return Synchronicity

Abstract

We show that the returns of individual stocks become more synchronous with the aggregate market during periods of high investor sentiment. We also document that the effect of sentiment on stock return synchronicity is especially pronounced for small, young, volatile, non-dividend-paying and low-priced stocks. This ‘difference in difference’ suggests that stocks with these characteristics are affected more by sentiment — consistent with previous studies. Our results support the hypothesis that greater constraints on arbitrage and the prevalence of sentiment-driven demand during periods of high sentiment lead to increased comovement among stocks.

Keywords: Aggregate Investor Sentiment; Stock Return Synchronicity; Time-Series Variation; Cross-Sectional Difference

JEL Classification: G12; G14