Institutional Investors and Market Sentiment

DeVault, Sias, and Starks (2019) find a positive correlation between institutional investors’ net buying of risky stocks and the contemporaneous change in market sentiment. They interpret this as evidence that institutional investors function as sentiment traders whose demand shocks drive prices away from value. However, this correlation may reflect a recovery from mispricing. We use the sentiment level as a measure of mispricing and find that on average, following high sentiment, institutional investors, including hedge funds, tend to sell (or buy less) risky stocks, and that their trades relate to sentiment corrections. Our findings are consistent with the notion that institutional investors on average bet against sentiment.

Keywords: Market sentiment, Institutional investors

JEL Classification: G12, G14, G15

Suggested Citation: Suggested Citation

Gao, Zhenyu and Luo, Jiang and Ren, Haohan and Zhang, Bohui, Institutional Investors and Market Sentiment (March 21, 2023). Nanyang Business School Research Paper No. 22-36, Available at SSRN: https://ssrn.com/abstract=4229046 or http://dx.doi.org/10.2139/ssrn.4229046