Efficient Markets : Information or Sentiment?

In this paper, we argue that investor sentiment is a more direct determinant for asset pricing than information, thus we propose the Sentiment Efficient Markets Hypothesis (S-EMH), complementary to the traditional Efficient Market Hypothesis (EMH), to provide a powerful instrument to interpret financial facts and anomalies inconsistent with the traditional EMH. Besides the theoretical argument, we also verify the hypothesis with a brand-new systematic index of investor sentiment, Gubasenti, derived from textual analysis on more than 200 million posts from an online Chinese stock forum. The examinations are implemented in both market-level and firm-level, and results show that investor sentiment has a significant impact on asset pricing in both levels. Our results demonstrate the proposed hypothesis