The Short of It: Investor Sentiment and Anomalies

Abstract

This study explores the role of investor sentiment in a broad set of anomalies in cross-sectional stock returns.We consider a setting where the presence of market-wide sentiment is combined with the argument that overpricing should be more prevalent than underpricing, due to short-sale impediments.Long-short strategies that exploit the anomalies exhibit profits consistent with this setting.First, each anomaly is stronger-its long-short strategy is more profitable-following high levels of sentiment.Second, the short leg of each strategy is more profitable following high sentiment.Finally, sentiment exhibits no relation to returns on the long legs of the strategies.

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