Investor sentiment and short selling: do animal spirits sell stocks?
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2020-07-15
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en
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Abstract
This paper examines the relationship between investor sentiment and short selling. This is done by calculating daily investor sentiment for every stock in the S&P 500 between January 1990 and December 2019 and group the stocks into four portfolios based on their investor sentiment. The effect of relative overpricing of stocks on their short interest ratio is compared for the different sentiment portfolios. Main result is that the relationship between relative overpricing and the short interest ratio is strongly positive for the highest investor sentiment portfolio and becomes less positive when relative investor sentiment declines. Taking economic recession periods into account does not seem to change the relationship between investor sentiment and short selling, although the effect of the relative overpricing on the short interest ratio becomes less positive for all sentiment portfolios.
Keywords: Behavioural finance, firm-specific investor sentiment, short interest ratio, return anomalies
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Faculteit der Managementwetenschappen