Investor Sentiment and Momentum and Contrarian Trading Strategies: Mutual Fund Evidence
52 Pages Posted: 17 Aug 2011
Date Written: August 16, 2011
Stocks with high sentiment betas are more sensitive to investor sentiment, with more subjective valuations. We contend that sentiment beta also captures the duration of mispricing. Accordingly, stocks with high (low) sentiment betas provide opportunities for momentum (contrarian) traders. We form hypothetical zero investment portfolios of high (low) sentiment betas stocks, and show that momentum profits decompose to reveal positive (negative) serial correlation of idiosyncratic returns, that contribute to momentum (contrarian) profits. Furthermore, actual mutual funds identified as momentum (contrarian) traders hold stocks with higher (lower) sentiment betas. Additionally, funds adjust sentiment betas to enhance performance as sentiment changes.
Keywords: Investor sentiment, Momentum, Contrarian, Mutual fund
JEL Classification: G2, G11, G14, G23
Suggested Citation: Suggested Citation