Investor ntiment and the cross-ction of stock returns
MALCOLM BAKER and JEFFREY WURGLER∗
ABSTRACT
We study how investor ntiment affects the cross-ction of stock returns. We predict that a wave of investor ntiment disproportionately affects curities who valuations are highly subjective and are difficult to arbitrage. We find that when beginning-of-period proxies for investor ntiment are low, subquent returns are relatively high on small stocks, young stocks, high volatility stocks, unprofitable stocks, non-dividend-paying stocks, extreme-growth stocks, and distresd stocks, suggesting that such stocks are relatively underpriced in low-ntiment states. When ntiment is high, on the other hand, the patterns largely rever, suggesting that the categories of stocks are relatively overpriced in high-ntiment states.
微信漫画头像∗ Baker is at the Harvard Business School and National Bureau of Economic Rearch; Wurgler is at the NYU Stern School of Business and the National Bureau of Economic Rearch. We thank an anonymous referee, Rob Stambaugh (the editor), Ned Elton, Wayne Ferson, Xavier Gabaix, Marty Gruber, Lisa Kramer, Owen Lamont, Martin Lettau, Anthony Lynch, Jay Shanken, Meir Statman, Sherid
an Titman, and Jeremy Stein for helpful comments, as well as participants of conferences or minars at Baruch College, Boston College, Chicago Quantitative Alliance, Emory University, the Federal Rerve Bank of New York, Harvard University, Indiana University, Michigan State University, NBER, Norwegian School of Economics and Business, Norwegian School of Management, New York University, Stockholm School of Economics, Tulane University, University of Amsterdam, University of British Columbia, University of Illinois, University of Kentucky, University of Michigan, University of Notre Dame, University of Texas, and University of Wisconsin. We gratefully acknowledge financial support from the Q Group and the Division of Rearch of the Harvard Business School.
Classical finance theory leaves no role for investor ntiment. In this theory, most investors are rational and diversify to optimize the statistical properties of their portfolios. Competition among them leads to an equilibrium in which prices equal the rationally discounted value of expected cash flows, and in which the cross-ction of expected returns depends only on the cross-ction of systematic risks.1 Even if some investors are irrational, classical theory argues, their demands are offt by arbitrageurs with no significant impact on prices.蓝紫
In this paper, we prent evidence that investor ntiment may have significant effects on the cross-
ction of stock prices. We start with simple theoretical predictions. Becau a mispricing is the result of an uninformed demand shock in the prence of a binding arbitrage constraint, a broad-bad wave of ntiment is predicted to have cross-ctional effects, not simply to rai or lower all prices equally, when ntiment-bad demands vary across stocks or when arbitrage constraints vary across stocks. In practice, the two distinct channels lead to quite similar predictions, becau stocks that are likely to be most nsitive to speculative demand – tho with highly subjective valuations – also tend to be the riskiest and costliest to arbitrage. Concretely, then, theory suggests two distinct channels through which the stocks of newer, smaller, highly volatile firms, firms in distress or with extreme growth potential, firms without dividends, and firms with like characteristics, are expected to be relatively more affected by shifts in investor ntiment.回归是什么意思
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To investigate this prediction empirically, and to get a more tangible n of the intrinsically elusive concept of investor ntiment, we start with a summary of ris and falls in U.S. market ntiment from 1961 through the Internet bubble. This summary is bad on anecdotal accounts and by its nature can only be a suggestive, ex-post characterization of fluctuations in ntiment. Nonetheless, its basic message appears broadly consistent with our theoretical predictions, and suggests that more rigorous tests are warranted.
Our main empirical approach is as follows. Becau cross-ctional patterns of ntiment-driven mispricing would be difficult to identify directly, we look for the hypothesized patterns in subquent stock returns that appear when one conditions on proxies for beginning-of-period investor ntiment. The idea is that conditional cross-ctional patterns in subquent returns may reprent the initial patterns of mispricing correcting themlves over time. For example, low future returns on young firms relative to old firms, conditional on high values for proxies for beginning-of-period ntiment, would be consistent with young firms being relatively overvalued ex ante. As usual, we are mindful of the joint hypothesis problem that any predictability patterns we find actually reflect compensation for systematic risks.
The first step is to gather proxies for investor ntiment to u as time ries conditioning variables. There are no perfect and/or uncontroversial proxies for investor ntiment, so our approach is necessarily practical. We consider a number of proxies suggested in recent work and form them into a composite ntiment index bad on their first principal component. To reduce the likelihood that the proxies are connected to systematic risks, we also form an index bad on ntiment proxies that have been orthogonalized to veral macroeconomic conditions. The ntiment indexes visibly line up with historical accounts of bubbles and crashes.
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We then test how the cross-ction of subquent stock returns varies with beginning-of-period ntiment. We u monthly stock returns between 1963 and 2001. We start by simply sorting firm-month obrvations according to the level of ntiment, first, and then the decile rank of a given firm characteristic, cond. We find that when ntiment is low (below sample average), small stocks earn particularly high subquent returns, but when ntiment is high (above average), there is no size effect at all. Conditional patterns are even sharper when sorting on other characteristics. When ntiment is low subquent returns are higher on very young (or newly listed) stocks than older stocks, high-return volatility than low-return volatility stocks, unprofitable stocks than profitable ones, and nonpayers than dividend payers. When ntiment is
high, the patterns completely rever. In other words, veral characteristics that do not have any unconditional predictive power actually display sign-flipping predictive ability, in the hypothesized directions, once one conditions on ntiment. The are our most striking findings. Although earlier data is not as rich, most of the patterns are also apparent in a sample that covers 1935 through 1961.
The sorts also suggest that ntiment affects extreme growth and distresd firms in similar ways. Note that when stocks are sorted into deciles by sales growth, book-to-market, or external financing 新年挂饰手工制作
activity, growth and distress firms tend to lie at opposing extremes, with more “stable” firms in middle deciles. We find that when ntiment is low, the subquent returns on stocks at both extremes are especially high relative to their unconditional average, while stocks in middle deciles are less affected by ntiment. (The result is not statistically significant for book-to-market, however.) This U-shaped pattern in conditional difference of returns also appears broadly consistent with theoretical predictions: both extreme-growth and distresd firms have relatively subjective valuations and are relatively hard to arbitrage, and so should be expected to be most affected by ntiment. Again, note that this intriguing conditional pattern would be averaged away in an unconditional study.
After confirming the patterns with a regression approach, we turn to the classical alternative explanation that they simply reflect a complex pattern of compensation for systematic risk. For instance, it would require either time variation in rational, market-wide risk premia or time variation in the cross-ctional pattern of risk, i.e., beta loadings. The results cast doubt on the notions. We test the cond possibility directly and find no link between the patterns in predictability and patterns in betas with market returns or consumption growth. If risk is not changing over time, then the first possibility requires not just time-variation in risk premia but changes in sign. Put simply, it would require that in half of our sample period (when ntiment is relatively low), that older, less volatile, profitable, dividend-paying firms actually require a risk
premium over very young, highly volatile, unprofitable, nonpayers. This is counterintuitive. Other results also suggest that systematic risk is at best a partial explanation.
The results challenge the classical view of the cross-ction of stock prices. In doing so, it builds on veral recent themes. In particular, our results complement earlier work that ntiment also helps to explain the time ries of returns (Kothari and Shanken (1997), Neal and Wheatley (1998), Shiller (1981, 2000), and Baker and Wurgler (2000)). Campbell and Cochrane (2000), Wachter (2000), Lettau and Ludvigson (2001), and Menzly, Santos, and Veronesi (2004) examine the effects of conditional systematic risks; we condition on ntiment. Daniel and Titman (1997) test a characteristics-bad model for the cross-ction of expected returns; we extend their specification and provide it with a specific, conditional motivation. Shleifer (2000) surveys early work on ntiment and limited arbitrage, two key ingredients here. Barberis and Shleifer (2003), Barberis, Shleifer, and Wurgler (2005), and Peng and Xiong (2004) discuss category-level trading, and Fama and French (1993) document comovement of stocks of similar sizes and book-to-market ratios; uninformed demand shocks for categories of stocks with similar characteristics are central to our results. Finally, we extend and unify known relationships among ntiment, IPOs, and small stock returns (Lee, Shleifer, and Thaler (1991), Swaminathan (1996), and Neal and Wheatley (1998)).
Section I discuss theoretical predictions. Section II provides a qualitative history of recent speculative episodes. Section III describes the empirical hypothes and the data, and the main empirical tests are contained in Section IV. Section V concludes.
I. Theoretical effects of ntiment on the cross-ction
南京大屠杀日子武汉大学专业排名A mispricing is the result of an uninformed demand shock and a limit on arbitrage. One can therefore think of two distinct channels through which investor ntiment, as defined more
