Premium Essay

Stmbh 1

In: Science

Submitted By Khushi22
Words 1908
Pages 8
Review of Article
The short of it: Investor sentiment and anomalies
Robert F. Stambaugh, Jianfeng Yu, Yu Yua
Objectives: The authors studied the role of investor sentiment in explaining equity market anomalies in cross-sectional stock returns. They studied the impact of sentiment on anomalies exploited in U.S. equity long–short strategies, examining both the long and short strategies. The authors contemplated that sentiment may partly explain the returns to equity pricing anomalies. The authors of the study probed the presence of sentiment effects by combining two prominent concepts: 1. Investor sentiment contains a market-wide component with the potential to influence prices on many securities in the same direction at the same time. 2. Impediments to short selling play a significant role in limiting the ability of rational traders to exploit overpricing.

Literature: The authors cited the following works: * The 2006 study "Investor Sentiment and the Cross-Section of Stock Returns" found that market-wide sentiment exerted stronger impacts on stocks that are difficult to value and hard to arbitrage. * The 2011 study "Investor Sentiment and the Mean-Variance Relation" found that the correlation between the market's expected return and its conditional volatility is positive during low-sentiment periods and nearly flat during high-sentiment periods -- the market is less rational during high-sentiment periods, due to higher participation by "noise" traders in such periods.

Concepts: The authors probed whether sentiment-related overpricing could explain asset-pricing anomalies: * Financial distress -- higher failure probability of a firm, lower the subsequent returns * Net stock issuance --equity issuers underperform matching non-issuers with similar characteristics * Accruals – firms with low accruals earn higher returns than firms with…...

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