Who are the Sentiment Traders? Evidence from the Cross-section of Stock Returns and Demand

Recent work suggests that sentiment traders shift from safer to more speculative stocks when sentiment increases. Given that the market clearing condition requires a buyer for every seller, we exploit these cross-sectional patterns and changes in share ownership to test whether investor sentiment metrics capture institutional or individual investors’ demand shocks. In contrast to theoretical assumptions and common perceptions, we find no evidence that individual investors’ trading is responsible for sentiment-induced demand shocks and mispricing. If the commonly used sentiment metrics truly capture investor sentiment, then institutional investors are the sentiment traders whose demand shocks drive prices from value.