Investor sentiment, investor crowded-trade behavior, and limited arbitrage in the cross section of stock returns

Liyun Zhou () and Chunpeng Yang
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Liyun Zhou: South China Agricultural University
Chunpeng Yang: South China University of Technology

Empirical Economics, 2020, vol. 59, issue 1, No 19, 437-460

Abstract: Abstract We examine the interaction effects of investor sentiment, investor crowded-trade behavior, and limited arbitrage on the cross section of stock returns. This paper presents strong evidence to reveal that investor crowded-trade behavior will increase stock prices greatly (little) among stocks with positive (negative) investor sentiment; and investor sentiment will increase (not increase) stock prices among stocks with extreme seller-initiated (buyer-initiated) crowded-trade behavior. Furthermore, this paper finds that the benchmark-adjusted returns are positive among stocks with relatively positive investor sentiment and buyer-initiated crowded-trade behavior, and negative among stocks with relatively negative investor sentiment and seller-initiated crowded-trade behavior. Finally, this paper demonstrates that limited arbitrage plays more roles on stocks with pessimistic sentiment and seller-initiated crowded-trade behavior. Taken together, this paper confirms the combined effects of investor sentiment and investor crowded-trade behavior on the cross section of stock returns, and further explores the moderating effect of limited arbitrage.

Keywords: Behavioral finance; Investor sentiment; Investor crowded-trade behavior; Limited arbitrage; Stock prices (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (8)

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DOI: 10.1007/s00181-019-01630-7

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