Retail Derivatives and Sentiment: A Sentiment Measure Constructed from Issuances of Retail Structured Equity Products

We use retail Structured Equity Product (SEP) issuances to construct a new sentiment measure for individual stocks. The SEP sentiment measure predicts negative abnormal returns on the SEPs’ reference stocks based on a variety of benchmarks including behavioral factor models and factors based on idiosyncratic volatility, short interest, and the 52-week high effect. Consistent with our interpretation that SEP issuances reflect investor sentiment, aggregate SEP issuances are highly correlated with the Baker-Wurgler sentiment index. Tobit regressions reveal that proxies for attention and sentiment predict demand for SEPs, providing additional evidence consistent with the hypothesis that SEP issuances reflect sentiment.