Persistence of investor sentiment and market mispricing

Xiao Han; Nikolaos  Sakkas; Arman Eshraghi; Jo  Danbolt

doi:10.1111/fire.12301

Persistence of investor sentiment and market mispricing

Xiao Han, Nikolaos Sakkas, Arman Eshraghi, Jo Danbolt

Department of Economics

Research output: Contribution to journal › Article › peer-review

17 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 language	English
Pages (from-to)	617-640
Number of pages	24
Journal	The Financial Review
Volume	57
Issue number	3
Early online date	17 May 2022
DOIs	https://doi.org/10.1111/fire.12301
Publication status	Published - 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

Access to Document

10.1111/fire.12301Licence: CC BY-NC

Cite this

@article{938178099f5c4adbb90efbfb724bb462,

title = "Persistence of investor sentiment and market mispricing",

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.",

keywords = "anomalies, arbitrage, market sentiment, predictability, structural breaks",

author = "Xiao Han and Nikolaos Sakkas and Arman Eshraghi and Jo Danbolt",

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: {\textcopyright} 2022 The Authors. The Financial Review published by Wiley Periodicals LLC on behalf of Eastern Finance Association.",

year = "2022",

month = aug,

day = "31",

doi = "10.1111/fire.12301",

language = "English",

volume = "57",

pages = "617--640",

journal = "The Financial Review",

issn = "0732-8516",

publisher = "Wiley-Blackwell",

number = "3",

}

TY - JOUR

T1 - Persistence of investor sentiment and market mispricing

AU - Han, Xiao

AU - Sakkas, Nikolaos

AU - Eshraghi, Arman

AU - Danbolt, Jo

N1 - 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.

PY - 2022/8/31

Y1 - 2022/8/31

N2 - 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.

AB - 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.

KW - anomalies

KW - arbitrage

KW - market sentiment

KW - predictability

KW - structural breaks

UR - http://www.scopus.com/inward/record.url?scp=85132625291&partnerID=8YFLogxK

U2 - 10.1111/fire.12301

DO - 10.1111/fire.12301

M3 - Article

SN - 0732-8516

VL - 57

SP - 617

EP - 640

JO - The Financial Review

JF - The Financial Review

IS - 3

ER -

Persistence of investor sentiment and market mispricing

Abstract

Bibliographical note

Keywords

ASJC Scopus subject areas

Access to Document

Other files and links

Fingerprint

Cite this