Sentiment and uncertainty

Justin Birru and Trevor Young

Journal of Financial Economics, 2022, vol. 146, issue 3, 1148-1169

Abstract: Sentiment should exhibit its strongest effects on asset prices at times when valuations are most subjective. Accordingly, we show that a one-standard-deviation increase in aggregate uncertainty amplifies the predictive ability of sentiment for market returns by two to four times relative to when uncertainty is at its mean. For the cross-section of returns, the predictive ability of sentiment for assets expected to be most sensitive to sentiment, including existing measures of both risk and mispricing, is substantially larger in times of higher uncertainty. The results hold for both daily and monthly proxies for sentiment and for various proxies for uncertainty.

Keywords: Sentiment; Uncertainty; Market return predictability; Cross-section of returns; Anomalies; Behavioral finance (search for similar items in EconPapers)
JEL-codes: D84 G12 G14 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:146:y:2022:i:3:p:1148-1169

DOI: 10.1016/j.jfineco.2022.05.005

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