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Sentiment bubbles

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  • Berger, David
  • Turtle, Harry J.

Abstract

We examine cumulative changes in investor sentiment and find that these changes relate to extended periods of increasing overvaluation, followed by price corrections. The relation between sentiment and returns is path dependent—short-term increases in sentiment precede strong positive returns, while prolonged periods of increasing sentiment precede negative returns. Positive short-run returns are consistent with bubble dynamics and mitigate the backwards induction conundrum described by Abreu and Brunnermeier (2003). Our results hold for the market portfolio, and are especially strong for opaque portfolios with high levels of uncertainty, as well as portfolios with greater market frictions that limit arbitrage.

Suggested Citation

  • Berger, David & Turtle, Harry J., 2015. "Sentiment bubbles," Journal of Financial Markets, Elsevier, vol. 23(C), pages 59-74.
    • Handle: RePEc:eee:finmar:v:23:y:2015:i:c:p:59-74
    DOI: 10.1016/j.finmar.2015.01.002
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    2. Ahmed Salhin & Mo Sherif & Edward Jones, 2016. "Investor Sentiment and Sector Returns," CFI Discussion Papers 1602, Centre for Finance and Investment, Heriot Watt University.

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    More about this item

    Keywords

    Investor sentiment; Bubbles; Price-correction;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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