Bidirectional relationship between investor sentiment and excess returns: new evidence from the wavelet perspective

Publikations-Art

Zeitschriftenbeitrag (peer-reviewed)

Autoren

Marczak, Martyna and Beissinger, Thomas

Erscheinungsjahr

2016

Veröffentlicht 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.