Can fund sentiment beta predict future performance?
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ORIGINAL ARTICLE
Can fund sentiment beta predict future performance? Qiang Bu1 · Odd J. Stalebrink1 Revised: 29 July 2020 / Published online: 5 September 2020 © Springer Nature Limited 2020
Abstract Using both actual and bootstrapped fund samples, this paper examines whether fund sentiment beta (FSB) can be used to predict future fund performance, whether FSB exhibits persistence across time periods, and whether FSB affects fund selectivity. We find that FSB has no significant effect on either current or subsequent fund performance and that it does not exhibit any persistence across time. Also, we find no evidence of a relationship between FSB and fund selectivity. Contrary to prior research, these findings suggest that an FSB-based strategy is unlikely to be a profitable strategy for fund managers. Keywords Fund sentiment beta · BW index · Persistence · Selectivity JEL Classification G11
Introduction Although the capital market is mostly efficient, investors get irrational from time to time, creating opportunities for abnormal investor returns. One source of investor irrationalities that has gained increased attention in academia over the past two decades is investor sentiment. Investor sentiment refers to the general mood an investor exhibit toward a particular market or asset. Scholarly research has shown that investor sentiment can be an important determinant of individual investors’ investment performance, and that individual investors that exhibit relative high sentiment tend to be overconfident and engage in excessive trading, resulting in subpar investment performance (Barber and Odean 2000; Antoniou et al. 2016). Scholarly research has also showed that the aggregate effect of individual investor sentiment is sufficiently large to affect the overall stock market, including price volatility and stock prices (Da et al. 2015; Siganos et al. 2017; Yang and Wu 2019). Recognizing these effects, a limited number of scholars have examined whether a profitable strategy can be designed to take advantage of investor sentiment. An early contribution to this literature was made by Glushkov (2006) who * Qiang Bu [email protected] 1
Pennsylvania State University-Harrisburg, Middletown, PA 17057, USA
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developed a measure of investor sentiment called “sentiment beta,” which measures the sensitivity of stock returns to sentiment changes. Using this measure, he found that stocks with high exposure to sentiment deliver lower future returns. He also found that more sentiment sensitive stocks tend to be smaller, younger, and have greater short-sales constraints, higher idiosyncratic volatility, and lower dividend yields. Given this, Glushkov’s findings support the idea that it is possible to design a profitable investment strategy based on sentiment beta. The viability of such a strategy is confirmed by research conducted by Massa and Yadav (2015), which shows that low-FSB funds tend to outperform high-FSB funds and that low-FSB funds follow more idiosyncratic strategies. Based on these findings, the author
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