Sentiment, limited attention and mispricing

Publication Type

Working Paper

Version

publishedVersion

Publication Date

12-2020

Abstract

We examine whether various anomalies can be driven by two common behavioral forces, namely, ``subjective'' sentiment (representing investors' subjective biased beliefs) and ``objective'' limited attention (representing investors' objective cognitive constraints). While sentiment explains well many anomalies that are more speculative on the short-leg, it fails to explain anomalies that are equally speculative on the long and short-leg, including momentum and post-earnings announcement drift. Market-wide attention shifts, proxied by number of news averaged across stocks, significantly attenuates underreaction-driven anomalies, beyond the effect of sentiment. Our findings suggest that increase in market-wide attention can temporarily reduce the cost of attending to market and improve price efficiency.

Discipline

Finance | Finance and Financial Management

Research Areas

Finance

First Page

1

Last Page

50

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