The sentiment premium and macroeconomic announcements

Ding Du and Ou Hu ()
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Ou Hu: Youngstown State University

Review of Quantitative Finance and Accounting, 2018, vol. 50, issue 1, No 7, 207-237

Abstract: Abstract Limits to arbitrage imply that market-wide investor sentiment should be a priced factor in the US equity market. While previous studies (Baker and Wurgler in J Financ 61:1645–1680, 2006) focus on the factor loading on market-wide investor sentiment, we study its factor premium in the present paper. This is important, because both factor loadings and premiums are required to estimate expected returns on stocks, which are essential for capital budgeting, portfolio evaluation, investment, and risk analysis decisions. If overpricing is more prevalent than underpricing (Stambaugh et al. in J Financ Econ 104:288–302, 2012), the premium on market-wide investor sentiment should be negative. Furthermore, the sentiment premium should be particularly significant on days without macroeconomic announcements, because there is a lack of information about the state of the economy at such times. We test these hypotheses in this paper, and find supporting evidence. Our findings have important theoretical as well as practical implications.

Keywords: Investor sentiment; Macroeconomic announcements; Cross-section of stock returns (search for similar items in EconPapers)
JEL-codes: G02 G12 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (6)

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DOI: 10.1007/s11156-017-0628-y

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