Tuesday, March 10, 2020
11:00 AM - 1:00 PM

10383 Bunche Hall
Los Angeles, 90095

There has been considerable debate in the recent literature as to whether investor sentiment predicts stock returns. Rational risk-based asset pricing models say that prices reflect the discounted value of expected future cash flows, and even if some investors are not rational, their irrationalities are quickly offset by arbitrageurs. Thus, there is no significant impact from investor sentiment on asset prices. On the other hand, the behavioral approach in finance suggests that investor sentiment, as reflected by retail investor demand, may cause prices to deviate from underlying fundamentals. Specifically, when sentiment rises, noise investors increase their investment allocations to risky assets, and this sentiment-driven uninformed demand for the assets drives prices above fundamental values of these assets. After periods of high sentiment, prices revert to fundamental values. Due to limits to arbitrage, the deviation from fundamental values can persist for a substantial period of time. This argument predicts an intertemporal relation between the level of investor sentiment and stock returns: a positive contemporaneous relation and a subsequent negative relation. In this lecture, Professor Kim will discuss the effectiveness of trading strategies using online sentiment measurements in the US stock market based on recent research.