Institutional Investors and Market Sentiment

71 Pages Posted: 30 Sep 2022 Last revised: 16 Nov 2023

See all articles by Zhenyu Gao

Zhenyu Gao

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Jiang Luo

Nanyang Business School, Nanyang Technological University

Haohan Ren

School of Management, Fudan University

Bohui Zhang

The Chinese University of Hong Kong, Shenzhen

Date Written: March 21, 2023

Abstract

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

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

Zhenyu Gao

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong
(852)39431824 (Phone)

HOME PAGE: http://sites.google.com/site/gao515515/

Jiang Luo

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore

Haohan Ren (Contact Author)

School of Management, Fudan University ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China

Bohui Zhang

The Chinese University of Hong Kong, Shenzhen ( email )

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