Persistence of investor sentiment and market mispricing

Xiao Han, Nikolaos Sakkas, Arman Eshraghi, Jo Danbolt

Research output: Contribution to journalArticlepeer-review

10 Citations (SciVal)

Abstract



We investigate changes in US market sentiment using structural break analysis over a period of five decades. We show that investor sentiment was trending and nonstationary from 1965 to 2001, a period associated with numerous crashes. Since 2001, sentiment has been substantially more mean reverting, implying the diminished effect of noise investors and their associated mispricing. We illustrate how these changes in sentiment persistence affect equity anomalies and assess the predictive power of sentiment on short-run returns when regime changes are considered. Our findings suggest that the presence of sentiment-driven investors and their market impact is significantly time-variant.
Original languageEnglish
Pages (from-to)617-640
Number of pages24
JournalThe Financial Review
Volume57
Issue number3
Early online date17 May 2022
DOIs
Publication statusPublished - 31 Aug 2022

Bibliographical note

Funding Information:
We thank the Editor Michael Goldstein and two anonymous referees for their helpful comments and thoughtful suggestions; as well as Niels Hermes, Talis Putnins, Richard Taffler, Wenzhao Wang, and seminar participants at Brunel University, University of Bath, the 2018 Scottish Doctoral Colloquium in Accounting and Finance, the 2019 Infiniti International Finance Conference, and the 2019 European Financial Management Association Conference for helpful comments and suggestions. Jo Danbolt holds the Baillie Gifford Chair in Financial Markets, and his research is partially funded by a Baillie Gifford endowment held by the University of Edinburgh Business School. Baillie Gifford has no role in or influence over the research conducted.

Funding Information:
We thank the Editor Michael Goldstein and two anonymous referees for their helpful comments and thoughtful suggestions; as well as Niels Hermes, Talis Putnins, Richard Taffler, Wenzhao Wang, and seminar participants at Brunel University, University of Bath, the 2018 Scottish Doctoral Colloquium in Accounting and Finance, the 2019 Infiniti International Finance Conference, and the 2019 European Financial Management Association Conference for helpful comments and suggestions. Jo Danbolt holds the Baillie Gifford Chair in Financial Markets, and his research is partially funded by a Baillie Gifford endowment held by the University of Edinburgh Business School. Baillie Gifford has no role in or influence over the research conducted.

Publisher Copyright:
© 2022 The Authors. The Financial Review published by Wiley Periodicals LLC on behalf of Eastern Finance Association.

Keywords

  • anomalies
  • arbitrage
  • market sentiment
  • predictability
  • structural breaks

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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