The Asymmetric Effects of Investor Sentiment

Published in Macroeconomic Dynamics, 2016

Key Highlight: This paper constructs a novel index of investor sentiment that is highly correlated with other behavioral indicators, but more closely tracks speculative episodes. The main new finding is that the effects of sentiment are asymmetric: During sentiment contractions high sentiment predicts low future returns for the cross section of speculative stocks and for the market overall, whereas the relationship between sentiment and future returns is positive but relatively weak during sentiment expansions.