Institutional Investors and Market Sentiment: A Revisit
50 Pages Posted: 30 Sep 2022 Last revised: 21 Mar 2023
Date Written: March 21, 2023
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 following high sentiment, institutional investors 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 bet against sentiment.
Keywords: Market sentiment, Institutional investors
JEL Classification: G12, G14, G15
Suggested Citation: Suggested Citation