Investor Sentiment and Asset Pricing in Public and Private Markets

Abstract

This paper examines the relation between investor sentiment and returns in public and private markets. We utilize commercial real estate as the testing ground to provide a unique side-by-side comparison of sentiment’s short- and long-run impact on similar assets that are owned and traded in two distinct investment environments. Using vector autoregressive models to capture the short-run dynamics between returns and investor sentiment, we find a positive relation between investor sentiment and subsequent quarter returns in both public and private real estate markets. The magnitude of this short-run effect is larger in public markets than in private markets, which is consistent with private market investors being better informed and more sophisticated. We further find a negative relation between investor sentiment and subsequent long-horizon public market returns, consistent with prices reverting to their fundamental values over the long-run. In contrast, we find sustained periods of sentiment-induced mispricing in private real estate markets, consistent with greater limits to arbitrage, short-sale constraints, information externalities, and delays in information transmission that characterize these markets. We thank the Real Estate Research Institute for providing partial funding for this project. We also thank Jon

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