IDEAS home Printed from https://ideas.repec.org/a/eee/jfinec/v114y2014i3p613-619.html
   My bibliography  Save this article

The long of it: Odds that investor sentiment spuriously predicts anomaly returns

Author

Listed:
  • Stambaugh, Robert F.
  • Yu, Jianfeng
  • Yuan, Yu

Abstract

Extremely long odds accompany the chance that spurious-regression bias accounts for investor sentiment׳s observed role in stock-return anomalies. We replace investor sentiment with a simulated persistent series in regressions reported by Stambaugh, Yu, and Yuan (2012), who find higher long-short anomaly profits following high sentiment, due entirely to the short leg. Among 200 million simulated regressors, we find none that support those conclusions as strongly as investor sentiment. The key is consistency across anomalies. Obtaining just the predicted signs for the regression coefficients across the 11 anomalies examined in the above study occurs only once for every 43 simulated regressors.

Suggested Citation

  • Stambaugh, Robert F. & Yu, Jianfeng & Yuan, Yu, 2014. "The long of it: Odds that investor sentiment spuriously predicts anomaly returns," Journal of Financial Economics, Elsevier, vol. 114(3), pages 613-619.
  • Handle: RePEc:eee:jfinec:v:114:y:2014:i:3:p:613-619
    DOI: 10.1016/j.jfineco.2014.07.008
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0304405X1400155X
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Antoniou, Constantinos & Doukas, John A. & Subrahmanyam, Avanidhar, 2013. "Cognitive Dissonance, Sentiment, and Momentum," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 48(1), pages 245-275, February.
    2. Novy-Marx, Robert, 2013. "The other side of value: The gross profitability premium," Journal of Financial Economics, Elsevier, vol. 108(1), pages 1-28.
    3. John Y. Campbell & Jens Hilscher & Jan Szilagyi, 2008. "In Search of Distress Risk," Journal of Finance, American Finance Association, vol. 63(6), pages 2899-2939, December.
    4. Gregory W. Brown & Michael T. Cliff, 2005. "Investor Sentiment and Asset Valuation," The Journal of Business, University of Chicago Press, vol. 78(2), pages 405-440, March.
    5. Malcolm Baker & Jeffrey Wurgler, 2006. "Investor Sentiment and the Cross‐Section of Stock Returns," Journal of Finance, American Finance Association, vol. 61(4), pages 1645-1680, August.
    6. Hirshleifer, David & Kewei Hou & Teoh, Siew Hong & Yinglei Zhang, 2004. "Do investors overvalue firms with bloated balance sheets?," Journal of Accounting and Economics, Elsevier, vol. 38(1), pages 297-331, December.
    7. Malcolm Baker & Jeffrey Wurgler, 2007. "Investor Sentiment in the Stock Market," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 129-152, Spring.
    8. Stambaugh, Robert F. & Yu, Jianfeng & Yuan, Yu, 2012. "The short of it: Investor sentiment and anomalies," Journal of Financial Economics, Elsevier, vol. 104(2), pages 288-302.
    9. Baker, Malcolm & Wurgler, Jeffrey & Yuan, Yu, 2012. "Global, local, and contagious investor sentiment," Journal of Financial Economics, Elsevier, vol. 104(2), pages 272-287.
    10. Michael J. Cooper & Huseyin Gulen & Michael J. Schill, 2008. "Asset Growth and the Cross‐Section of Stock Returns," Journal of Finance, American Finance Association, vol. 63(4), pages 1609-1651, August.
    11. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
    12. Wayne E. Ferson & Sergei Sarkissian & Timothy T. Simin, 2003. "Spurious Regressions in Financial Economics?," Journal of Finance, American Finance Association, vol. 58(4), pages 1393-1414, August.
    13. Ohlson, Ja, 1980. "Financial Ratios And The Probabilistic Prediction Of Bankruptcy," Journal of Accounting Research, Wiley Blackwell, vol. 18(1), pages 109-131.
    14. Yuhang Xing, 2008. "Interpreting the Value Effect Through the Q-Theory: An Empirical Investigation," Review of Financial Studies, Society for Financial Studies, vol. 21(4), pages 1767-1795, July.
    15. Stambaugh, Robert F., 1999. "Predictive regressions," Journal of Financial Economics, Elsevier, vol. 54(3), pages 375-421, December.
    16. Kent Daniel & Sheridan Titman, 2006. "Market Reactions to Tangible and Intangible Information," Journal of Finance, American Finance Association, vol. 61(4), pages 1605-1643, August.
    17. Miller, Edward M, 1977. "Risk, Uncertainty, and Divergence of Opinion," Journal of Finance, American Finance Association, vol. 32(4), pages 1151-1168, September.
    18. Loughran, Tim & Ritter, Jay R, 1995. "The New Issues Puzzle," Journal of Finance, American Finance Association, vol. 50(1), pages 23-51, March.
    19. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    20. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    21. Titman, Sheridan & Wei, K. C. John & Xie, Feixue, 2004. "Capital Investments and Stock Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(4), pages 677-700, December.
    22. Robert F. Stambaugh & Jianfeng Yu & Yu Yuan, 2015. "Arbitrage Asymmetry and the Idiosyncratic Volatility Puzzle," Journal of Finance, American Finance Association, vol. 70(5), pages 1903-1948, October.
    23. Brown, Gregory W. & Cliff, Michael T., 2004. "Investor sentiment and the near-term stock market," Journal of Empirical Finance, Elsevier, vol. 11(1), pages 1-27, January.
    24. Ritter, Jay R, 1991. "The Long-run Performance of Initial Public Offerings," Journal of Finance, American Finance Association, vol. 46(1), pages 3-27, March.
    25. Fama, Eugene F. & French, Kenneth R., 2006. "Profitability, investment and average returns," Journal of Financial Economics, Elsevier, vol. 82(3), pages 491-518, December.
    26. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. "Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
    27. Michael Lemmon & Evgenia Portniaguina, 2006. "Consumer Confidence and Asset Prices: Some Empirical Evidence," Review of Financial Studies, Society for Financial Studies, vol. 19(4), pages 1499-1529.
    28. Yu, Jianfeng, 2013. "A sentiment-based explanation of the forward premium puzzle," Journal of Monetary Economics, Elsevier, vol. 60(4), pages 474-491.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Stambaugh, Robert F. & Yu, Jianfeng & Yuan, Yu, 2012. "The short of it: Investor sentiment and anomalies," Journal of Financial Economics, Elsevier, vol. 104(2), pages 288-302.
    2. Robert F. Stambaugh & Yu Yuan, 2017. "Mispricing Factors," Review of Financial Studies, Society for Financial Studies, vol. 30(4), pages 1270-1315.
    3. Jacobs, Heiko, 2015. "What explains the dynamics of 100 anomalies?," Journal of Banking & Finance, Elsevier, vol. 57(C), pages 65-85.
    4. Chung, San-Lin & Hung, Chi-Hsiou & Yeh, Chung-Ying, 2012. "When does investor sentiment predict stock returns?," Journal of Empirical Finance, Elsevier, vol. 19(2), pages 217-240.
    5. Xiaomeng Lu & Robert F. Stambaugh & Yu Yuan, 2017. "Anomalies Abroad: Beyond Data Mining," NBER Working Papers 23809, National Bureau of Economic Research, Inc.
    6. Kim, Dongcheol & Lee, Inro & Na, Haejung, 2019. "Financial distress, short sale constraints, and mispricing," Pacific-Basin Finance Journal, Elsevier, vol. 53(C), pages 94-111.
    7. Jacobs, Heiko, 2016. "Market maturity and mispricing," Journal of Financial Economics, Elsevier, vol. 122(2), pages 270-287.
    8. Guo, Li & Li, Frank Weikai & John Wei, K.C., 2020. "Security analysts and capital market anomalies," Journal of Financial Economics, Elsevier, vol. 137(1), pages 204-230.
    9. Jang, Jeewon & Kang, Jangkoo, 2019. "Probability of price crashes, rational speculative bubbles, and the cross-section of stock returns," Journal of Financial Economics, Elsevier, vol. 132(1), pages 222-247.
    10. Doron Avramov & Si Cheng & Allaudeen Hameed, 2020. "Mutual Funds and Mispriced Stocks," Management Science, INFORMS, vol. 66(6), pages 2372-2395, June.
    11. Turan G. Bali & Florian Weigert, 2018. "Have Hedge Funds Solved the Idiosyncratic Volatility Puzzle?," Working Papers on Finance 1827, University of St. Gallen, School of Finance.
    12. Cheema, Muhammad A. & Scrimgeour, Frank, 2019. "Oil prices and stock market anomalies," Energy Economics, Elsevier, vol. 83(C), pages 578-587.
    13. Shen, Junyan & Yu, Jianfeng & Zhao, Shen, 2017. "Investor sentiment and economic forces," Journal of Monetary Economics, Elsevier, vol. 86(C), pages 1-21.
    14. Akbas, Ferhat & Armstrong, Will J. & Sorescu, Sorin & Subrahmanyam, Avanidhar, 2015. "Smart money, dumb money, and capital market anomalies," Journal of Financial Economics, Elsevier, vol. 118(2), pages 355-382.
    15. Beneish, M.D. & Lee, C.M.C. & Nichols, D.C., 2015. "In short supply: Short-sellers and stock returns," Journal of Accounting and Economics, Elsevier, vol. 60(2), pages 33-57.
    16. Kewei Hou & Haitao Mo & Chen Xue & Lu Zhang, 2019. "Which Factors?," Review of Finance, European Finance Association, vol. 23(1), pages 1-35.
    17. Lee, Eunju & Piqueira, Natalia, 2017. "Short selling around the 52-week and historical highs," Journal of Financial Markets, Elsevier, vol. 33(C), pages 75-101.
    18. Zhu, Zhaobo & Ji, Qiang & Sun, Licheng & Zhai, Pengxiang, 2020. "Oil price shocks, investor sentiment, and asset pricing anomalies in the oil and gas industry," International Review of Financial Analysis, Elsevier, vol. 70(C).
    19. Paul Calluzzo & Fabio Moneta & Selim Topaloglu, 2019. "When Anomalies Are Publicized Broadly, Do Institutions Trade Accordingly?," Management Science, INFORMS, vol. 65(10), pages 4555-4574, October.
    20. Stefan Nagel, 2013. "Empirical Cross-Sectional Asset Pricing," Annual Review of Financial Economics, Annual Reviews, vol. 5(1), pages 167-199, November.

    More about this item

    Keywords

    Investor sentiment; Anomalies; Spurious regressors;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jfinec:v:114:y:2014:i:3:p:613-619. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Haili He). General contact details of provider: http://www.elsevier.com/locate/inca/505576 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.