Retail Derivatives and Sentiment: A Sentiment Measure Constructed from Issuances of Retail Structured Equity Products

Journal of Finance

113 Pages Posted: 29 Jul 2020 Last revised: 13 Jan 2023

See all articles by Brian J. Henderson

Brian J. Henderson

George Washington University - Department of Finance

Neil D. Pearson

University of Illinois at Urbana-Champaign - Department of Finance

Li Wang

Case Western Reserve University

Date Written: December 7, 2022

Abstract

We use retail Structured Equity Product (SEP) issuances to construct a new sentiment measure for large capitalization stocks. The SEP sentiment measure predicts negative abnormal returns on the SEP reference stocks based on a variety of factor models, and also predicts returns in Fama-MacBeth regressions that include a wide range of covariates. Consistent with our interpretation that SEP issuances reflect investor sentiment, aggregate SEP issuances are highly correlated with the Baker-Wurgler sentiment index. Tobit regressions reveal that proxies for attention and sentiment predict SEP issuance volumes, providing additional evidence consistent with the hypothesis that SEP issuances reflect sentiment.

Keywords: Structured equity products, sentiment, cross-section of returns, predictability

JEL Classification: G13, G14, G23

Suggested Citation

Henderson, Brian Joseph and Pearson, Neil D. and Wang, Li, Retail Derivatives and Sentiment: A Sentiment Measure Constructed from Issuances of Retail Structured Equity Products (December 7, 2022). Journal of Finance, Available at SSRN: https://ssrn.com/abstract=3642883 or http://dx.doi.org/10.2139/ssrn.3642883

Brian Joseph Henderson (Contact Author)

George Washington University - Department of Finance ( email )

Department of Finance, Funger Hall
2201 G Street, NW
Washington, DC 20052
United States
202-994-3669 (Phone)

Neil D. Pearson

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
217-244-0490 (Phone)
217-244-9867 (Fax)

Li Wang

Case Western Reserve University ( email )

Weatherhead School of Management,
Case Western Reserve University
Cleveland, OH 44106
United States

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