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Cross-sectional performance and investor sentiment in a multiple risk factor model

Dave Berger and H.J. Turtle

Journal of Banking & Finance, 2012, vol. 36, issue 4, 1107-1121

Abstract: Economists have long recognized the importance of information veracity in valuing risky securities. Market participants concerned about the credibility of information measures may require additional compensation to entice them to hold stocks with less transparent information. These same securities are expected to display greater sensitivities to measures of market sentiment. We find that investor sentiment sensitivities increase directly with multiple measures of opacity in the cross-section. Next we examine the extent to which sentiment sensitivities are priced in an asset pricing context. Using the Jha et al. (2009) model of conditional performance evaluation, we find an inverse relation between ex ante known investor sentiment and the marginal performance of opaque stocks. In contrast, translucent stocks exhibit relatively little variability in performance across levels of sentiment.

Keywords: Investor sentiment; Asset-pricing; Conditional performance (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2012
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Handle: RePEc:eee:jbfina:v:36:y:2012:i:4:p:1107-1121