Dual effects of investor sentiment and uncertainty in financial markets

Sangik Seok, Hoon Cho and Doojin Ryu

The Quarterly Review of Economics and Finance, 2024, vol. 95, issue C, 300-315

Abstract: This study investigates the interplay between firm-level investor sentiment and uncertainty in financial markets. We demonstrate that investor sentiment significantly influences short-term stock market returns, particularly when there is an increase in firm-level uncertainty. This correlation becomes weaker among firms experiencing a decrease in uncertainty. The cross-sectional effect of sentiment is more pronounced during periods of heightened uncertainty, as evidenced by the higher returns of sentiment-based long-short portfolios under these conditions. Our findings are robust to adjusting for various factors and using alternative uncertainty and sentiment measures.

Keywords: Cross-sectional returns; Mispricing; Sentiment; Time-series returns; Uncertainty (search for similar items in EconPapers)
JEL-codes: G12 G14 G15 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:95:y:2024:i:c:p:300-315

DOI: 10.1016/j.qref.2024.04.006

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