Speculation Sentiment

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 it to form the Speculation Sentiment Index. Using the index, I show that speculation sentiment is contrarian; For example, it is bullish in down markets. I also find that speculation sentiment distorts prices and it negatively predicts aggregate stock returns