The behaviour of sentiment-induced share returns: measurement when fundamentals are observable

Brealey, R A, Cooper, I and Kaplanis, E (2016) The behaviour of sentiment-induced share returns: measurement when fundamentals are observable. In: Portfolio Construction, Measurement, and Efficiency: Essays in Honor of Jack Treynor. Springer International Publishing, Switzerland, pp. 291-313. ISBN 9783319339764

Abstract

We test the effect of sentiment on returns using a sample of upstream oil stocks where we have a good proxy for fundamental value. For this sample, the influence of sentiment is highly time-varying, appearing only after the post-2000 increased interest in oil-related assets. Contrary to the hard-to-arbitrage hypothesis, sentiment affects returns on these stocks principally through their fundamentals rather than through deviations from fundamentals. Retail investor sentiment predicts short-term momentum of fundamentals and Baker–Wurgler sentiment predicts mean reversion of fundamental factors. These effects appear in a portfolio that is long hard-to-arbitrage stocks and short easy-to-arbitrage stocks, but only because this portfolio has net exposure to fundamentals.

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Item Type: Book Section
Subject Areas: Finance
Subjects: I > Investment appraisal
Date Deposited: 07 Dec 2016 12:15
Last Modified: 18 Jul 2018 16:04
URI: http://lbsresearch.london.edu/id/eprint/763
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