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Investor sentiment and the mean-variance relation

Jianfeng Yu and Yu Yuan ()

Journal of Financial Economics, 2011, vol. 100, issue 2, 367-381

Abstract: This study shows the influence of investor sentiment on the market's mean-variance tradeoff. We find that the stock market's expected excess return is positively related to the market's conditional variance in low-sentiment periods but unrelated to variance in high-sentiment periods. These findings are consistent with sentiment traders who, during the high-sentiment periods, undermine an otherwise positive mean-variance tradeoff. We also find that the negative correlation between returns and contemporaneous volatility innovations is much stronger in the low-sentiment periods. The latter result is consistent with the stronger positive ex ante relation during such periods.

Keywords: Investor; sentiment; Mean-variance; relation; Risk-return; tradeoff; Volatility (search for similar items in EconPapers)
Date: 2011
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Handle: RePEc:eee:jfinec:v:100:y:2011:i:2:p:367-381