The January sentiment effect in the U.S. stock market

Chen, Zhongdong; Daves, Phillip R.

doi:10.1016/j.irfa.2018.07.008

Cited by 10 publications

(13 citation statements)

References 56 publications

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“…If January sentiment drives investors’ asset allocation decisions in the stock market (e.g. Doran et al , 2012; Chen and Daves, 2018), we should observe a similar effect in the bond market. Specifically, we expect to see that sentiment in January impacts bond pricing in following months, because stock and bond markets are affected by common factors (e.g.…”

Section: Introductionmentioning

confidence: 79%

“…Further evaluating the OJE, Chen and Daves (2018) examined the period 1978–2016 and found that the OJE can be partially explained by the effect that the change in the ICS in January has on stock returns during the rest of the year. They reason that consumer sentiment explains the OJE in the stock market as the OJE may be due to investors’ asset allocation decisions which are driven by sentiment.…”

Section: Literature Review and Hypothesismentioning

confidence: 99%

“…They reason that consumer sentiment explains the OJE in the stock market as the OJE may be due to investors’ asset allocation decisions which are driven by sentiment. Following Cooper et al (2006) and Chen and Daves (2018), we implement the direction of the change in January sentiment as a determinant to evaluate if sentiment also has predictive power in the US corporate bond market.…”

Section: Literature Review and Hypothesismentioning

confidence: 99%

“…A few prior studies attribute this anomaly to data snooping (e.g. Easton and Pinder, 2007; Bohl and Salm, 2010; Marshall and Visaltanachoti, 2010); however, more recently Chen and Daves (2018) attributed the OJE in the US stock market to investors’ asset allocation decisions driven by January consumer sentiment. Sentiment in the US stock market is widely researched (DeLong et al , 1990; Baker and Wurgler, 2006, 2007; Laborda and Olmo, 2014, to name a few) and studies show that asset pricing anomalies can be attributed to sentiment.…”

Section: Introductionmentioning

confidence: 99%

“…In addition, most of the previous studies on the OJE (e.g. Cooper et al , 2006; Easton and Pinder, 2007; Bohl and Salm, 2010; Marshall and Visaltanachoti, 2010; Chen and Daves, 2018) focus on aggregate market returns and our study focuses on bond trades. Specifically, we investigate the relationship between the change in January sentiment and monthly bond spreads in the rest of the year for bonds trading in the secondary market.…”

Section: Introductionmentioning

confidence: 99%

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January sentiment effect in the US corporate bond market

Chen¹,

Craig

2018

RBF

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Purpose The purpose of this paper is to investigate the impact of January sentiment on investors’ asset allocation decisions in the US corporate bond market during the rest of the year. Specifically, the study evaluates if the shift in January sentiment is a predictor of corporate bond spreads from February to December. Design/methodology/approach Using corporate bond trades reported in TRACE between 2005 and 2014, the authors examine the ability of the Index of Consumer Sentiment and the Index of Investor Sentiment to predict bond spreads over the 11 months following January. The study evaluates both the sign of the change in sentiment and the magnitude of the change in sentiment using two generalized linear models, controlling for industry, bond and firm fixed effects. Portfolios are analyzed based on yield, firm size and firm leverage. Additional analysis is performed to ensure results are robust to the impacts of the subprime financial crisis. Findings This paper finds that the changes in the sentiment measures in January predict bond spreads associated with bond trades in the subsequent 11 months, and this phenomenon, which the authors label as the “January sentiment effect,” has opposing impacts on risky and less risky bond portfolios. Originality/value This paper adds to the literature on the relationship between sentiment and investor’s allocation decisions. The evidence documented in this study is the first known to find that investors’ allocation decisions in a year are driven by their sentiment in January.

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Section: Introductionmentioning

confidence: 79%

Section: Literature Review and Hypothesismentioning

confidence: 99%

Section: Literature Review and Hypothesismentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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January sentiment effect in the US corporate bond market

Chen¹,

Craig

2018

RBF

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Correcting the January optimism effect

Franses

2020

Journal of Forecasting

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Each month, various professional forecasters give forecasts for next year's real gross domestic product (GDP) growth and unemployment. January is a special month, when the forecast horizon moves to the following calendar year. Instead of deleting the January data when analyzing forecast updates, I propose a periodic version of a test regression for weak‐form efficiency. An application of this periodic model for many forecasts across a range of countries shows that in January GDP forecast updates are positive, whereas the forecast updates for unemployment are negative. I document that this January optimism about the new calendar year is detrimental to forecast accuracy. To empirically analyze Okun's law, I also propose a periodic test regression, and its application provides more support for this law.

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