Nonlinear effect of sentiment on momentum

Kai Li

Journal of Economic Dynamics and Control, 2021, vol. 133, issue C

Abstract: I study a Lucas exchange economy with many trees and a representative agent who forms extrapolative beliefs on market returns (market-wide sentiment). As a result of sentiment spillovers, the agent believes that there is momentum in the cross section of asset returns. However, from the point of view of an outside econometrician, the market price of risk relates negatively to sentiment. This, together with the subjective momentum, causes returns on momentum strategies to be a concave function of sentiment, leading to a downside risk of momentum. I find empirical evidence consistent with model predictions.

Keywords: Extrapolation; Investor sentiment; Spillovers; Momentum; Skewness (search for similar items in EconPapers)
JEL-codes: G12 G40 (search for similar items in EconPapers)
Date: 2021
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165188921001883
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:133:y:2021:i:c:s0165188921001883

DOI: 10.1016/j.jedc.2021.104253

Access Statistics for this article

Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

More articles in Journal of Economic Dynamics and Control from Elsevier
Bibliographic data for series maintained by Catherine Liu ().