Bidirectional relationship between investor sentiment and excess returns: new evidence from the wavelet perspective
- Publication Type
- Journal contribution (peer reviewed)
- Authors
- Marczak, Martyna and Beissinger, Thomas
- Year of publication
- 2016
- Published in
- Applied Economics Letters
- Band/Volume
- Published online first/
- DOI
- 10.1080/13504851.2016.1153782
We propose to use the wavelet concept of the phase angle to determine the lead-lag relationship between investor sentiment and excess returns that are related to the bubble component of stock prices. The wavelet phase angle allows for decoupling short- and long-run relations and is additionally capable of identifying time-varying comovement patterns. Based on the monthly S&P500 index and two alternative monthly US sentiment indicators, we find that in the short run (until 3 months), sentiment is leading returns whereas for periods above 3 months the opposite can be observed. Moreover, the initially strong positive relationship becomes less pronounced with increasing time horizon, thereby indicating that the over- or undervaluation in the short run is gradually corrected in the long run.