Persistence of investor sentiment and market mispricing

Xiao Han, Nikos Sakkas*, Jo Danbolt, Arman Eshraghi

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract / Description of output

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
JournalFinancial Review
Volume57
Issue number3
Early online date17 May 2022
DOIs
Publication statusPublished - Aug 2022

Keywords / Materials (for Non-textual outputs)

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

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