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Institutional and Individual Sentiment: Smart Money and Noise Trader Risk

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Author Info
Schmeling, Maik

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Abstract

Using a new data set on investor sentiment we show that institutional and individual sentiment proxy for smart money and noise trader risk, respectively. First, using bias-adjusted long-horizon regressions, we document that institutional sentiment forecasts stock market returns at intermediate horizons correctly, whereas individuals consistently get the direction wrong. Second, VEC models show that institutional sentiment forecasts mean-reversion whereas individuals forecast trend continuation. Finally, institutional investors take into account expected individual sentiment when forming their expectations in a way that higher (lower) expected sentiment of individuals lowers (increases) institutional return forecasts. Individuals neglect the information contained in institutional sentiment.

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Paper provided by Universität Hannover, Wirtschaftswissenschaftliche Fakultät in its series Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover with number dp-337.

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Length: 37 pages
Date of creation: May 2006
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Handle: RePEc:han:dpaper:dp-337

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Keywords: investor sentiment predictive regressions noise trader smart money

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Find related papers by JEL classification:
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Menkhoff, Lukas & Suwanaporn, Chodechai, 2007. "10 Years after the Crisis: Thailand's Financial System Reform," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover dp-356, Universität Hannover, Wirtschaftswissenschaftliche Fakultät. [Downloadable!]
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  2. Menkhoff, Lukas & Rebitzky, Rafael, 2007. "Investor sentiment in the US-dollar: longer-term, nonlinear orientation on PPP," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover dp-376, Universität Hannover, Wirtschaftswissenschaftliche Fakultät. [Downloadable!]
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