The Asymmetric Effects of Investor Sentiment

Chandler Lutz

Research output: Working paperResearch

Abstract

We use the returns on lottery-like stocks to construct a novel index for investor sentiment in the stock market. This new measure is closely related to previously developed sentiment indicators, but more accurately tracks speculative episodes over the sample period. Using our index, we find that the relationship between sentiment and returns is asymmetric: during bear markets, high sentiment predicts low future returns for the cross-section of speculative stocks and the market overall while the relationship during bull markets is weak and often insignificant. Thus, the results suggest that sophisticated investors only act as corrective force during certain time periods. We also show that our index predicts implied volatility, media pessimism, and mutual fund flows. Overall, our findings are consistent with both the theories and anecdotal accounts of investor sentiment in the stock market.
Original languageEnglish
Place of Publicationwww
PublisherSSRN: Social Science Research Network
Number of pages46
DOIs
Publication statusPublished - 2012

Cite this

Lutz, C. (2012). The Asymmetric Effects of Investor Sentiment. SSRN: Social Science Research Network. https://doi.org/10.2139/ssrn.2050435