Investor sentiment and price discovery: Evidence from the pricing dynamics between the futures and spot markets
Robin K. Chou and
George H.K. Wang
Journal of Banking & Finance, 2018, vol. 90, issue C, 17-31
This study examines the role of investor sentiment in the pricing dynamics between the spot and futures markets. The empirical evidence suggests that investor sentiment has a positive impact on price volatility and the bid–ask spread on both the spot and futures markets, which induces higher arbitrage risk and trading costs during high sentiment periods. Consequently, during high sentiment periods, informed traders become less willing to leverage their information advantages on the futures market, which diminishes the futures markets’ leading informational role and contributions to price discovery. Our findings provide support for the theory of limits to arbitrage.
Keywords: Information shares; Investor sentiment; Lead–lag relation; Limits to arbitrage; Price discovery (search for similar items in EconPapers)
JEL-codes: G02 G12 G14 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:90:y:2018:i:c:p:17-31
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