Investor sentiment and return predictability of disagreement

Jun Sik Kim, Doojin Ryu and Sung Won Seo

Journal of Banking & Finance, 2014, vol. 42, issue C, 166-178

Abstract: This study examines the influence of investor sentiment on the relationship between disagreement among investors and future stock market returns. We find that the relationship between disagreement and future stock market returns time-varies with the degree of investor sentiment. Higher disagreement among investors’ opinions predicts significantly lower future stock market returns during high-sentiment periods, but it has no significant effect on future stock market returns during low-sentiment periods. Our findings imply that investor sentiment is related to several causes of short-sale impediments suggested in the previous literature on investor sentiment, and that the stock return predictability of disagreement is driven by investor sentiment. We demonstrate that investor sentiment has a significant impact on the stock market return predictability of disagreement through in-sample and out-of-sample analyses. In addition, the profitability of our suggested trading strategy exploiting disagreement and investor sentiment level confirms the economic significance of incorporating investor sentiment into the relationship between disagreement among investors and future stock market returns.

Keywords: Investor sentiment; Disagreement; Return predictability (search for similar items in EconPapers)
JEL-codes: G12 G14 G17 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (40)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:42:y:2014:i:c:p:166-178

DOI: 10.1016/j.jbankfin.2014.01.017

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