Investor Sentiment and Price Momentum

This paper sheds empirical light on whether investor sentiment affects the profitability of price momentum strategies. We hypothesize that when investors are optimistic, their expectations will be more miscalibrated relative to those obtained from objective probabilities, and arbitrage will be more difficult with short-selling constraints. Our results show that momentum rises only when investors are optimistic, and that optimistic momentum portfolios experience long-run reversals. These results provide support to the behavioral theories, suggesting that short-run momentum and long-run reversal commonly arise from investors’ behavioral biases. Antoniou is from the Centre for Empirical Research in Finance, Durham University. Doukas is from Old Dominion University and Judge Business School, University of Cambridge. Subrahmanyam is from the Anderson School, University of California, Los Angeles. Address correspondence to A. Subrahmanyam, The Anderson School at UCLA, Los Angeles, CA 90095-1481, email: [email protected], phone (310) 825-5355. We thank Haim Levy for valuable comments and Conference Board for kindly providing us with the sentiment data. We also thank Jeffrey Wurgler and Malcom Baker for making the sentiment index publicly available. Investor Sentiment and Price Momentum