Degree Year

2020

Document Type

Thesis

Degree Name

Bachelor of Arts

Department

Economics

Advisor(s)

Barbara J. Craig
John V. Duca
Christopher Andrew James Cotter

Keywords

Finance, Market anomaly, Noise trader risk, Fama-French, Mispricing, Market capitalization, Behavioral Economics

Abstract

This paper analyzes the impact of “irrational” investor’s sentiment on the abnormal returns of low and high cap stock portfolios. The “rational” and “irrational” sentiments are constructed using asset pricing fundamentals and the AAII sentiment survey data. The abnormal returns are calculated as the difference between the actual and FamaFrench model returns. I note that due to higher limits of arbitrage for the small cap stocks, the main effect of the “rational” and “irrational” sentiments on the small-cap portfolio seems stronger than on the large-cap portfolio. Moreover, I note that the mispricing of the large-cap stocks seems to revert to its fundamental value faster than the low cap stocks, supporting the theory of greater limits of arbitrage in a small-cap market than the large-cap market. Furthermore, I discover that the “irrational” sentiment has statistically significant interaction with the previous week’s large-cap mispricing on both the current week’s small and large cap mispricing. I attribute this statistical significance to the broader visibility of the large-cap stocks compared to the small-cap stocks. However, my interpretation of the mispricing interaction would need to be further tested with the market volume movements.

Included in

Economics Commons

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