Working Paper: NBER ID: w18231
Authors: Robert F. Stambaugh; Jianfeng Yu; Yu Yuan
Abstract: Extremely long odds accompany the chance that spurious-regression bias accounts for investor sentiment's observed role in stock-return anomalies. We replace investor sentiment with a simulated persistent series in regressions reported by Stambaugh, Yu and Yuan (2012), who find higher long-short anomaly profits following high sentiment, due entirely to the short leg. Among 200 million simulated regressors, we find none that support those conclusions as strongly as investor sentiment. The key is consistency across anomalies. Obtaining just the predicted signs for the regression coefficients across the 11 anomalies examined in the above study occurs only once for every 43 simulated regressors.
Keywords: Investor Sentiment; Stock Return Anomalies; Spurious Regression
JEL Codes: C18; G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| current investor sentiment (G41) | future long-short return spreads (G19) |
| current investor sentiment (G41) | future short-leg returns (G17) |
| current investor sentiment (G41) | future long-leg returns (J17) |