Investor sentiment and economic forces

Junyan Shen, Jianfeng Yu and Shen Zhao

Journal of Monetary Economics, 2017, vol. 86, issue C, 1-21

Abstract: Economic theory suggests that pervasive factors should be priced in the cross-section of stock returns. However, our evidence shows that portfolios with higher risk exposure do not earn higher returns. More importantly, our evidence shows a striking two-regime pattern for all 10 macro-related factors: high-risk portfolios earn significantly higher returns than low-risk portfolios following low-sentiment periods, whereas the exact opposite occurs following high-sentiment periods. These findings are consistent with a setting in which market-wide sentiment is combined with short-sale impediments and sentiment-driven investors undermine the traditional risk-return tradeoff, especially during high-sentiment periods.

Keywords: Investor sentiment; Macro risk; Factor; Beta; Market efficiency (search for similar items in EconPapers)
JEL-codes: G02 G12 G14 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (75)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:86:y:2017:i:c:p:1-21

DOI: 10.1016/j.jmoneco.2017.01.001

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