The Short of It: Investor Sentiment and Anomalies
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.
We are grateful for helpful comments from Wayne Ferson, Murray Frank, Paul Irvine, Robert Novy-Marx, Stavros Panageas, Lubos Pastor, Jinghua Yan, seminar participants at the University of Minnesota, Shanghai Advanced Institute of Finance (SAIF), and Fudan University, and participants at the 2010 Conference on Financial Economics and Accounting. We also thank Edmund Lee and Huijun Wang for excellent research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Stambaugh, Robert F. & Yu, Jianfeng & Yuan, Yu, 2012. "The short of it: Investor sentiment and anomalies," Journal of Financial Economics, Elsevier, vol. 104(2), pages 288-302. citation courtesy of