Investor Attention and Sentiment: Risk or Anomaly?

Melk C. Bucher ()

No 1712, Working Papers on Finance from University of St. Gallen, School of Finance

Abstract: Are stocks' varying sensitivities to changing investor attention and sentiment priced? Employing internet search-based proxies for both, I find novel results that are consistent with theory. Stocks that co-vary negatively with increased investor attention to the stock market outperform in the following months in a behavior consistent with a risk premium. The pricing of co-variation with investor sentiment depends on aggregate mispricing (Baker-Wurgler index), behaving like a risk premium when mispricing is low and like an anomaly when mispricing is high. Sensitivity to both sentiment and attention is strongly related to idiosyncratic volatility and limits to arbitrage: High absolute attention/sentiment loadings are associated with higher volatility, smaller size and other limits to arbitrage. However, the priced attention and sentiment components are clearly distinct from the idiosyncratic risk puzzle and stay significant when controlling for relevant pricing factors and company characteristics. Investor attention is both very robust and highly powerful in pricing a broad variety of test assets. On the other hand, investor sentiment's effect on performance is strongly related to return reversal/momentum and does not add much information on its own.

Keywords: Investor attention; investor sentiment; limits to arbitrage; asset pricing; idiosyncratic risk puzzle (search for similar items in EconPapers)
JEL-codes: G02 G12 (search for similar items in EconPapers)
Pages: 88 pages
Date: 2017-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://ux-tauri.unisg.ch/RePEc/usg/sfwpfi/WPF-1712.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:usg:sfwpfi:2017:12

Access Statistics for this paper

More papers in Working Papers on Finance from University of St. Gallen, School of Finance Contact information at EDIRC.
Bibliographic data for series maintained by ().