Investor Sentiment in Asset Pricing Models: A Review

Szymon Lis
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Szymon Lis: University of Warsaw, Faculty of Economic Sciences, Department of Quantitative Finance

No 2022-14, Working Papers from Faculty of Economic Sciences, University of Warsaw

Abstract: Despite the number of works on investor sentiment in asset pricing models the results did not allow to obtain a coherent knowledge about this sentiment. Most of the researchers used different measures and various models to study the impact of sentiment on stocks returns. However, the empirical relationship between investor sentiment and stock market behavior remains unclear. This study focuses on reviewing the methodologies and empirical findings of 71 papers published between 2000 and 2021 that apply different investor sentiment measures for modeling returns. The research confirmed two out of the three research hypotheses that the investor sentiment proxies and higher complexity of the model with the investor sentiment indicator improve the coefficient of determination. The second one was rejected, however, this may be due to too small a sample. For the hypothesis that models with more complex sentiment have better predictive power than those with simpler proxies, the number of studies was insufficient to refer strongly to the hypothesis.

Keywords: Investor sentiment; Asset pricing; Multifactor models; Behavioral finance; Risk factors; stock market behavior (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 G40 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2022
New Economics Papers: this item is included in nep-fmk
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https://www.wne.uw.edu.pl/download_file/1732/0 First version, 2022 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:war:wpaper:2022-14

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