Institutional and Individual Sentiment: Smart Money and Noise Trader Risk

Hannover Economic Papers (HEP) from Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät

Abstract: Using a new data set on investor sentiment we show that institutional and individual sentiment proxy for smart money and noise trader risk, respectively. First, using bias-adjusted long-horizon regressions, we document that institutional sentiment forecasts stock market returns at intermediate horizons correctly, whereas individuals consistently get the direction wrong. Second, VEC models show that institutional sentiment forecasts mean-reversion whereas individuals forecast trend continuation. Finally, institutional investors take into account expected individual sentiment when forming their expectations in a way that higher (lower) expected sentiment of individuals lowers (increases) institutional return forecasts. Individuals neglect the information contained in institutional sentiment.

Keywords: investor sentiment; predictive regressions; noise trader; smart money (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2006-05
New Economics Papers: this item is included in nep-cbe, nep-fin, nep-fmk, nep-for, nep-rmg and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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http://diskussionspapiere.wiwi.uni-hannover.de/pdf_bib/dp-337.pdf (application/pdf)

Related works:
Journal Article: Institutional and individual sentiment: Smart money and noise trader risk? (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:han:dpaper:dp-337

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