Working Paper: NBER ID: w16898
Authors: Robert F. Stambaugh; Jianfeng Yu; Yu Yuan
Abstract: This study explores the role of investor sentiment in a broad set of anomalies in cross-sectional stock returns. We consider a setting where the presence of market-wide sentiment is combined with the argument that overpricing should be more prevalent than underpricing, due to short-sale impediments. Long-short strategies that exploit the anomalies exhibit profits consistent with this setting. First, each anomaly is stronger--its long-short strategy is more profitable--following high levels of sentiment. Second, the short leg of each strategy is more profitable following high sentiment. Finally, sentiment exhibits no relation to returns on the long legs of the strategies.
Keywords: Investor sentiment; Stock anomalies; Market pricing; Short-sale constraints
JEL Codes: G0; G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high investor sentiment (G41) | stronger stock price anomalies (G41) |
| high investor sentiment (G41) | lower returns on the short leg of anomaly strategies (G40) |
| high investor sentiment (G41) | no significant effect on long leg returns (G40) |
| investor sentiment (G41) | overpricing during high sentiment periods (G41) |