Sizes, Styles, and the Tale of Two Sentiments : Asymmetric Nonlinear Analysis

Investor sentiment has been shown to predict future stock returns. However, its unknown whether sentiment and stock prices have a long-run relationship and whether retail and professional investors’ sentiment proxies have a short-run or long-run predictive power on future returns of stocks of different sizes and styles. We employ an asymmetric model to assess the short-run and long-run impact of positive and negative retail and professional investors’ sentiment proxies on stock returns of large-, medium-, small-, and micro-cap stocks and value and growth portfolios. We find a monotonically strengthening (weakening) and asymmetric cointegration between retail (professional) investors’ sentiment in size-capitalized portfolios. Rising sentiment consistently has a higher positive predictive power than decreasing sentiment on stock returns for all but growth portfolios.There are long-run asymmetric effects, but short-run asymmetry is limited to large-cap, micro-cap, and growth portfolios. Overall, changes in sentiment persistence have significant implications for asset pricing