Does Sentiment Affect Stock Returns? A Meta-analysis Across Survey-based Measures

We are the first to analyse the literature on the relationship between sentiment and stock returns, a topic which reacts to the history of systemic events causing asset bubbles in financial markets. Our meta-analysis of 1311 point estimates from 30 primary studies suggests that the true effect of an improvement in sentiment is significant and negative. In the majority of specifications, researchers tend to report this effect as being much stronger than it actually is, but in specific subsamples we also find positive publication bias driving the results into less negative or even positive territory. We reveal that the effect of sentiment on future returns is significantly stronger in the case of individual investors compared with large institutions and in the case of stock markets in the US compared with Europe. The effect also depends on several data and model characteristics. We propose an implied estimate which suggests that a one standard deviation increase in sentiment reduces future monthly returns by 0.198 standard deviations on average. This result may help enhance the predictive power of stock market models and be useful in conducting stress tests of financial markets and assessments of risks to financial stability.