Investor sentiment and futures market mispricing

We examine the effects of sentiment on mispricing in a highly liquid index futures market. Investor sentiment significantly affects futures mispricing, supporting its role in explaining price dynamics. Overly optimistic sentiment induces futures market overvaluation whereas pessimistic sentiment loses its explanatory power in undervaluation after controlling for trading activities and macroeconomic factors. The sentiment effect is more pronounced when noisy individual trading prevails.