Seasonal Investor Sentiment and Sentiment Beta in Stock Returns
Summary
The document summarizes research on whether seasonal shifts in investor mood help explain recurring cross-sectional patterns in stock returns. It treats January, March, and Fridays as relatively optimistic periods, and September, October, and Mondays as relatively pessimistic, then tests whether stocks’ past returns in similar or opposite sentiment periods predict later returns. Similar-period performance tends to recur, while performance across opposite sentiment periods tends to reverse. The analysis covers individual US stocks and portfolios, using both predetermined calendar periods and periods identified from realized market returns.
The paper also defines sentiment beta as a stock’s sensitivity to equal-weighted market returns during high- and low-sentiment periods. Long-short portfolios based on this measure reportedly earn positive risk-adjusted returns, and its predictive power remains after controlling for conventional market beta and a broad investor sentiment measure. A combined monthly and weekly beta is proposed to reduce noise. The evidence comes from historical US data spanning decades; the document does not establish that the patterns persist in other markets or after implementation costs, and it cautions that the findings are not investment advice.
Key ideas
- Past returns in high- or low-sentiment periods tend to predict returns in later periods with matching sentiment.
- Returns in historically opposite-sentiment periods show reversal patterns in both monthly and weekly tests.
- Sentiment beta measures a stock’s return sensitivity to the equal-weighted market during sentiment extremes.
- The reported predictive value of sentiment beta persists after controlling for market beta and a separate sentiment measure.
- Combining monthly and weekly sentiment betas is presented as a way to reduce measurement noise.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.