The Short of It: Investor Sentiment and Anomalies
The short of it: Investor sentiment and anomalies by* Robert F. Stambaugh, Jianfeng Yu, and Yu Yuan
November 3, 2011
Abstract
This study explores the role of investor sentiment in a broad set of anomalies in cross-sectional stock returns. We consider a setting in which the presence of marketwide sentiment is combined with the argument that overpricing should be more prevalent than underpricing, due to short-sale impediments. Long-short strategies that exploit the anomalies exhibit profits consistent with this setting. First, each anomaly is stronger (its long-short strategy is more profitable) following high levels of sentiment.
Second, the short leg of each strategy is more profitable following high sentiment.
Finally, sentiment exhibits no relation to returns on the long legs of the strategies.
JEL classifications: G12, G14
Keywords: investor sentiment, anomalies
* We are grateful for helpful comments from Scott Cederburg, Zhi Da, Kent Daniel, Wayne Ferson,
ˇ
Murray Frank, Byoung-Hyoun Hwang, Paul Irvine, Robert Novy-Marx, Stavros Panageas, Luboˇ P´stor, s a
Bill Schwert, Jeff Wurgler, Jinghua Yan, seminar participants at Fudan University, Shanghai Advanced Institute of Finance (SAIF), the University of Arizona, the University of Minnesota, and the University of
Pennsylvania, and participants at the 2010 Conference on Financial Economics and Accounting, the 2011
China International Conference in Finance, the 2011 Driehaus Behavioral Finance Symposium, the 2011
George Washington University–International Monetary Fund Conference on Behavioral Finance, and the
2011 National Bureau of Economic Research Behavioral Finance Meeting. We also thank Edmund Lee and
Huijun Wang for excellent research assistance. Jianfeng Yu gratefully acknowledges financial support from the Dean’s Small Research Grant from the Carlson School of Management at the University of Minnesota.
Stambaugh: Miller, Anderson & Sherrerd Professor of Finance, The Wharton School,
November 3, 2011
Abstract
This study explores the role of investor sentiment in a broad set of anomalies in cross-sectional stock returns. We consider a setting in which the presence of marketwide sentiment is combined with the argument that overpricing should be more prevalent than underpricing, due to short-sale impediments. Long-short strategies that exploit the anomalies exhibit profits consistent with this setting. First, each anomaly is stronger (its long-short strategy is more profitable) following high levels of sentiment.
Second, the short leg of each strategy is more profitable following high sentiment.
Finally, sentiment exhibits no relation to returns on the long legs of the strategies.
JEL classifications: G12, G14
Keywords: investor sentiment, anomalies
* We are grateful for helpful comments from Scott Cederburg, Zhi Da, Kent Daniel, Wayne Ferson,
ˇ
Murray Frank, Byoung-Hyoun Hwang, Paul Irvine, Robert Novy-Marx, Stavros Panageas, Luboˇ P´stor, s a
Bill Schwert, Jeff Wurgler, Jinghua Yan, seminar participants at Fudan University, Shanghai Advanced Institute of Finance (SAIF), the University of Arizona, the University of Minnesota, and the University of
Pennsylvania, and participants at the 2010 Conference on Financial Economics and Accounting, the 2011
China International Conference in Finance, the 2011 Driehaus Behavioral Finance Symposium, the 2011
George Washington University–International Monetary Fund Conference on Behavioral Finance, and the
2011 National Bureau of Economic Research Behavioral Finance Meeting. We also thank Edmund Lee and
Huijun Wang for excellent research assistance. Jianfeng Yu gratefully acknowledges financial support from the Dean’s Small Research Grant from the Carlson School of Management at the University of Minnesota.
Stambaugh: Miller, Anderson & Sherrerd Professor of Finance, The Wharton School,
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