Journal of Financial and Quantitative Analysis Vol. 57 No. 7 2022

Speculation Sentiment

Shaun Davies^{1,2,3,4,5,6,7,8,9}

¹ Baylor University · ² Chapman University · ³ University of Colorado Boulder · ⁴ Cornell University · ⁵ University of Utah · ⁶ University of California San Diego · ⁷ University of Virginia · ⁸ Arizona State University · ⁹ Carnegie Mellon University

Abstract

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.

DOI

10.1017/s0022109022000291

Volume

57

Issue

7

Pages

2485-2515

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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