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Retail Derivatives and Sentiment: A Sentiment Measure Constructed from Issuances of Retail Structured Equity Products

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  • BRIAN J. HENDERSON
  • NEIL D. PEARSON
  • LI WANG

Abstract

We use retail structured equity product (SEP) issuances to construct a new sentiment measure for large capitalization stocks. The SEP sentiment measure predicts negative abnormal returns on the SEP reference stocks based on a variety of factor models, and also predicts returns in Fama‐MacBeth regressions that include a wide range of covariates. Consistent with our interpretation that SEP issuances reflect investor sentiment, aggregate SEP issuances are highly correlated with the Baker‐Wurgler sentiment index. Tobit regressions reveal that proxies for attention and sentiment predict SEP issuance volumes, providing additional evidence consistent with the hypothesis that SEP issuances reflect sentiment.

Suggested Citation

  • Brian J. Henderson & Neil D. Pearson & Li Wang, 2023. "Retail Derivatives and Sentiment: A Sentiment Measure Constructed from Issuances of Retail Structured Equity Products," Journal of Finance, American Finance Association, vol. 78(4), pages 2365-2407, August.
    • Handle: RePEc:bla:jfinan:v:78:y:2023:i:4:p:2365-2407
    DOI: 10.1111/jofi.13253
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