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Persistence of investor sentiment and market mispricing

Han, X., Sakkas, N., Danbolt, J. & Eshraghi, A. (2022). Persistence of investor sentiment and market mispricing. Financial Review, doi: 10.1111/fire.12301

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.

Publication Type: Article
Subjects: H Social Sciences > HG Finance
Departments: Bayes Business School > Finance
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