The impact of individual and institutional investor sentiment on the market price of risk

Rahul Verma and Gökçe Soydemir

The Quarterly Review of Economics and Finance, 2009, vol. 49, issue 3, pages 1129-1145

Abstract: We examine the effect of individual and institutional investor sentiment on the market price of risk derived from DJIA and S&P500 index returns. Consistent with behavioral asset pricing models, we find significant positive response of rational sentiment suggesting greater incentive for rational investors to engage in arbitrage when the compensation for taking risk is greater. Further, an increase in irrational optimism leads to a significant downward movement, but an increase in rational sentiment does not lead to a significant change market price of risk. These results are robust for both market indexes, DJIA and S&P500 and for both individual and institutional investor sentiment.

Keywords: Stock; returns; Investor; sentiment; VAR; model (search for similar items in EconPapers)
Date: 2009

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Persistent link: http://EconPapers.repec.org/RePEc:eee:quaeco:v:49:y:2009:i:3:p:1129-1145

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