Asymmetric reactions to news? The influence of investor sentiment on the effectiveness of long-short strategies

Abstract

During this research, I looked into the effect of investor sentiment upon the reaction to news, and what this implies for long-short trading strategies. The strategies used in this research are the momentum strategy and return reversal strategy. As a proxy for an optimistic sentiment, a bull market phase is used, while for a pessimistic sentiment, a bear market phase is used. Within those sentiment conditions, I look into the asymmetric reactions to news, meaning that during pessimism investors overreact to bad news, but underreact to good news, while the opposite holds for optimism. My findings are that while in a bear market the evidence is suggesting an asymmetrical reaction, this does not hold in a bull market. Furthermore, there is evidence supporting that a bull market is beneficial for momentums strategy. The bear market is inconclusive.