Photo sentiment and stock returns around the world

Utilizing a recently developed measure of investor sentiment based on a large sample of news photos (i.e. Photo Pessimism), this paper examines the relation between investor sentiment and stock market returns around the world. We find that investor sentiment proxied by Photo Pessimism is negatively related to contemporaneous returns in 37 international equity markets. Photo Pessimism positively predicts subsequent market returns and trading volume, reflecting temporary sentiment-induced mispricing and the subsequent correction. The effect of Photo Pessimism on global stock markets is stronger amongst smaller markets and in periods where risk aversion is elevated. This indicates that sentiment-induced mispricing is more pronounced in the presence of limits-to-arbitrage.