Stock market sentiment goes back a long way, Keynes (1936) argued in his General Theory

that so-called ‘animal spirits’ driven the stock market investors, which can cause stock market
prices to leave from fundamentals.
This behavioral interpretation on the stock market has often analyzed by the traditional
argument that rational traders, arbitrageurs, could exploit the mispricing and bring the prices
back to fundamental value.
However, obstacles may limit the effectiveness of arbitrageurs and allow the (sentiment-
driven) mispricing to persist, such limits-to-arbitrage. These would lead to investor sentiment
having significant effect on returns in the cross-section and along that line, also on the
existence of stock market anomalies.

The return difference between these two groups of stocks called the value premium and its
existence has been ever-puzzling academics. First, stocks that have a high book value
compared to the market value, systematically report higher returns than growth stocks, and
second, stocks whose book value is low compared to their market value.

The explanations for the value premium can be split up in two main categories. The first
category is the rational expectations approach, which argues that value premium represents
the difference in risk between distressed firms (value) and well-performing firms (growth).
The other category is behavior, stating that the value premium does not represent risk. They
argue that the value premium arises because of mispricing caused by relative over- and
undervaluation, which is then not arbitraged away. Except these two categories there exists
another strand of literature that even states that the value premium is merely a statistical
phenomenon. Recent research however, has found that the value premium is still very much
alive, having an annualized premium of 6.1% (Chen et al., 2008).

Jeffrey and al., (2016)1 study how investor sentiment affects the speed with which prices
reflects information. Price discovery is timelier for firms with greater sensitivity to sentiment,
as measured by a sentiment beta. Their research improves to understand price formation when
sentiment not assumed to be constant. This research design is novel as it considers a sentiment
beta as well as economy-wide sentiment. This provides the comprehensive evidence on the
impact of deferring types of sentiment on the price formation.

Liyan et al., (2017) 2uses the search volume for key terms on Google as a direct and
timely proxy for investor sentiment to examine impact of attention on commodity futures
prices. They provide significant evidence for attention’s influence on 13 commodity futures
and the relations between attention and returns, even after controlling for important
macroeconomic variables. They also examine the impact of investor attention on market
efficiency. Results show that rising attention, first, increases information efficiency and
lessens arbitrage opportunities, whereas, second, decreases market efficiency by promoting
herd behavior.

1
Jeffrey J. C, Tami D and Andrew B. J, (2016). The impact of sentiment on price discovery, Accounting and
Finance 56 (2016) 669–694
2
Liyan H, Ziying L and Libo Y, (2017). The effects of investor attention on commodity futures markets, J
Futures Markets. 2017;37:1031–1049.