Sentiment Beta Research Articles

Mutual Fund Trades: Timing Sentiment and Managing Tracking Error Variance

We use portfolio holdings to show that mutual funds preferentially trade stocks according to the stocks’ sentiment betas. Stocks with high sentiment betas are more responsive to investor sentiment and increase (decrease) in value as sentiment increases (decreases). Sentiment-based trades may be motivated by the opportunity to increase fund returns through timing predictability in sentiment, or by management of portfolio risk. Sentiment is mean-reverting, but its level and recent change only partially explain these trades. In contrast, 30 percent of sentiment-based trades are explained by the initial sentiment beta of funds that trade to reduce their tracking error variance.

Investor Sentiment and Momentum and Contrarian Trading Strategies: Mutual Fund Evidence

Stocks with high sentiment betas are more sensitive to investor sentiment, with more subjective valuations. We contend that sentiment beta also captures the duration of mispricing. Accordingly, stocks with high (low) sentiment betas provide opportunities for momentum (contrarian) traders. We form hypothetical zero investment portfolios of high (low) sentiment betas stocks, and show that momentum profits decompose to reveal positive (negative) serial correlation of idiosyncratic returns, that contribute to momentum (contrarian) profits. Furthermore, actual mutual funds identified as momentum (contrarian) traders hold stocks with higher (lower) sentiment betas. Additionally, funds adjust sentiment betas to enhance performance as sentiment changes.

Investor Sentiment Risk Factor and Asset Pricing Anomalies

We investigate the role of investor sentiment as a risk factor in stock returns. The average return differential is 1.48% (0.75%) per month between the decile portfolis with the highest positive (most negative) sentiment beta and that with zero sentiment beta. The sentiment factor, SMN, has statistically significant average returns ranging from 1.36% to 0.67% per month, and commands a positive and statistically significant risk premium. Consistent with the theory that sentiment creates a risk in addition to fundamental risk, the sentiment-augmented asset-pricing models always explain the size effect, and conditional models often capture the size, value and momentum effects.

Selectivity, Style, Sentiment and Skill in Mutual Fund Trades

Fund managers can only exhibit selectivity through purchasing (selling) stocks that appreciate (depreciate) more frequently than expected from random occurrence, if stocks are incorrectly priced. We develop a method that can statistically identify fund managers that exhibit net, buy, and sell selectivity in their trades, as well as distinguish manager skill from fortuitous stock selection. Stock investor sentiment betas are calculated from the recently developed investor sentiment index, and used to indicate stock mispricing. We find that superior stock selection is concentrated in funds that hold high sentiment beta stocks; the major constituent of funds with the aggressive growth objective.