Efficient Markets: Information or Sentiment?

Abstract

In this paper, we argue that investor sentiment is a more direct determinant for asset pricing than information, and thus propose the Sentiment Efficient Markets Hypothesis (S-EMH). S-EMH is complementary to the traditional Efficient Market Hypothesis (EMH), and provides a powerful instrument to interpret financial facts and anomalies inconsistent with EMH. Besides the theoretical argument, we verify the hypothesis with a brand-new systematic index of investor sentiment, Gubasenti, derived from textual analysis on over 200 million posts from an online Chinese stock forum. Both market-level and firm-level empirical results show that investor sentiment has a significant impact on asset pricing.

Keywords: Asset Pricing; Efficient Market Hypothesis; Investor Sentiment; Return Predictability; Sentiment Efficient Markets; Textual Analysis

JEL Classification: G02; G12; G14