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 large capitalization stocks. The SEP sentiment measure predicts negative abnormal returns on the SEP reference stocks based on a variety of factor models, and also predicts returns in Fama-MacBeth regressions that include a wide range of covariates. 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 SEP issuance volumes, providing additional evidence consistent with the hypothesis that SEP issuances reflect sentiment.