Investor sentiment, investor crowded-trade behavior, and limited arbitrage in the cross section of stock returns

  • Liyun ZhouEmail author
  • Chunpeng Yang


We examine the interaction effects of investor sentiment, investor crowded-trade behavior, and limited arbitrage on the cross section of stock returns. This paper presents strong evidence to reveal that investor crowded-trade behavior will increase stock prices greatly (little) among stocks with positive (negative) investor sentiment; and investor sentiment will increase (not increase) stock prices among stocks with extreme seller-initiated (buyer-initiated) crowded-trade behavior. Furthermore, this paper finds that the benchmark-adjusted returns are positive among stocks with relatively positive investor sentiment and buyer-initiated crowded-trade behavior, and negative among stocks with relatively negative investor sentiment and seller-initiated crowded-trade behavior. Finally, this paper demonstrates that limited arbitrage plays more roles on stocks with pessimistic sentiment and seller-initiated crowded-trade behavior. Taken together, this paper confirms the combined effects of investor sentiment and investor crowded-trade behavior on the cross section of stock returns, and further explores the moderating effect of limited arbitrage.


Behavioral finance Investor sentiment Investor crowded-trade behavior Limited arbitrage Stock prices 



This study was funded by the Natural Science Foundation of China (71803051; 71471067), the Natural Science Foundation of Guangdong Province (2018A030310218); the project of Guangdong Planning office of Philosophy and Social Science in 2017 (GD17XLJ04; GD17XGL14), the youth project of Department of Education of Guangdong Province (2017WQNCX014), the Natural Science Foundation of China (71720107002).

Compliance with ethical standards

Conflict of interest

No conflict of interest exits in the submission of this manuscript, and manuscript is approved by all authors for publication. Author A declares that she has no conflict of interest. Author B declares that he has no conflict of interest.

Ethical approval

This article does not contain any studies with human participants or animals performed by any of the authors.


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© Springer-Verlag GmbH Germany, part of Springer Nature 2019

Authors and Affiliations

  1. 1.College of Economics and ManagementSouth China Agricultural UniversityGuangzhouChina
  2. 2.School of Economics and CommerceSouth China University of TechnologyGuangzhouChina

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