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Speculation Sentiment

Published online by Cambridge University Press:  11 April 2022

Shaun William Davies Open the ORCID record for Shaun William Davies [Opens in a new window]
Shaun William Davies*
Affiliation:
University of Colorado Boulder Leeds School of Business
*
[email protected]
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Abstract

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I exploit the leveraged exchange-traded funds’ (ETFs’) primary market to measure aggregate, uninformed, gambling-like demand, that is, speculation sentiment. The leveraged ETFs’ primary market is a novel setting that provides observable arbitrage activity attributed to correcting mispricing between ETFs’ shares and their underlying assets. The arbitrage activity proxies for the magnitude and direction of speculative demand shocks and I use them to form the Speculation Sentiment Index. The measure negatively relates to contemporaneous market returns (e.g., it is bullish in down markets) and negatively predicts returns. The results are consistent with speculation sentiment causing market-wide price distortions that later reverse.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 7 , November 2022 , pp. 2485 - 2515
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

I thank Turan Bali, Hendrik Bessembinder (the editor), Daniel Brown, David C. Brown, Roberto Caccia, Alex Chinco, Tony Cookson, Mike Cooper, Martijn Cremers, Zhi Da (the referee), Rob Dam, Andrew Detzel, Hui Dong, Rich Evans, Diego Garcia, David Ikenberry, Pab Jotikasthira, Andrew Karolyi, G. D. Knolls, Joni Kokkonen, Ryan Lewis, Nathalie Moyen, Peter Nolan, Matthew Ringgenberg, Charles Robbins, Shri Santosh, Clemens Sialm, Michael Stutzer, Brian T. Waters, Quan Wen, Ed Van Wesep, Jaime Zender, and conference and seminar participants at the 2019 China International Conference in Finance (CICF), 2019 Financial Intermediation Research Society (FIRS), UCLA Anderson Finance Conference in honor of Bhagwan Chowdhry, 2019 Front Range Finance Seminar, 2019 American Finance Association Annual Meeting (AFA), 8th Helsinki Finance Summit on Investor Behavior, 1st World Symposium on Investment Research, Arizona State University, Baylor University, the University of California, San Diego, Carnegie Mellon University, Chapman University, Cornell University, the University of Colorado, Boulder, the University of Utah, and the University of Virginia Darden School for their helpful insights and suggestions. All errors are my own. The Speculation Sentiment Index data are located on my website: https://www.shaunwdavies.com/.

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