Re‐examining investor sentiment and stock returns: A replication and extension of Baker and Wurgler (2006)

Kaiwen Leong, Dan Li, Huailu Li, Chuangwei Peng and Zhanyu Xu

Economic Inquiry, 2026, vol. 64, issue 1, 88-119

Abstract: This study replicates and extends Baker and Wurgler's (2006) analysis on investor sentiment's impact on stock returns. We confirm their findings by demonstrating the significant cross‐sectional effect of sentiment in both their original sample (1963–2002) and a new sample (2002–2023). Expanding the scope, we introduce a monthly sentiment measure and analyze the U.S. market (2002–2023) and the Chinese market. Our results show that the predictive strength of sentiment indicators can shift or invert over time. In the Chinese market, sentiment's expected cross‐sectional effects disappear when foundational conditions, such as stock valuation variance, are not met.

Date: 2026
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