Sentiment bubbles

David Berger and Harry J. Turtle

Journal of Financial Markets, 2015, vol. 23, issue C, 59-74

Abstract: We examine cumulative changes in investor sentiment and find that these changes relate to extended periods of increasing overvaluation, followed by price corrections. The relation between sentiment and returns is path dependent—short-term increases in sentiment precede strong positive returns, while prolonged periods of increasing sentiment precede negative returns. Positive short-run returns are consistent with bubble dynamics and mitigate the backwards induction conundrum described by Abreu and Brunnermeier (2003). Our results hold for the market portfolio, and are especially strong for opaque portfolios with high levels of uncertainty, as well as portfolios with greater market frictions that limit arbitrage.

Keywords: Investor sentiment; Bubbles; Price-correction (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:23:y:2015:i:c:p:59-74

DOI: 10.1016/j.finmar.2015.01.002

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