Sentiment versus liquidity pricing effects in the cross-section of UK stock returns

Niall O’Sullivan (), Sheng Zhu and Jason Foran
Additional contact information
Niall O’Sullivan: University College Cork
Jason Foran: University College Cork

Journal of Asset Management, 2019, vol. 20, issue 4, No 6, 317-329

Abstract: Abstract This study examines the asset pricing role of ‘sentiment risk’ in UK stock returns. We define sentiment risk as the sensitivity of stock returns to investor sentiment in financial markets. We incorporate a broad range of financial market variables in measuring financial conditions and use this as a proxy for market-wide investor sentiment. The paper distinguishes between rational and irrational (noisy) investor sentiment. Initial findings indicate a strong role for rational sentiment risk in the returns of FTSE All-Share stocks. However, further analysis reveals that this sentiment risk pricing is detected in the FTSE All-Share subgroup of FTSE small-cap stocks, while no evidence of sentiment risk pricing is found among the FTSE All-Share subgroups of FTSE 250 and FTSE 100 stocks. Our paper makes a key contribution by identifying that evidence of rational sentiment risk pricing disappears after controlling for the liquidity risk features of stocks. More generally, our findings point to a strong relation between sentiment risk and liquidity risk in stock returns and to the need for careful disentangling of sentiment versus liquidity effects.

Keywords: Sentiment risk; Asset pricing; Stock returns; Financial conditions (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://link.springer.com/10.1057/s41260-019-00119-3 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:assmgt:v:20:y:2019:i:4:d:10.1057_s41260-019-00119-3

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/41260

DOI: 10.1057/s41260-019-00119-3

Access Statistics for this article

Journal of Asset Management is currently edited by Marielle de Jong and Dan diBartolomeo

More articles in Journal of Asset Management from Palgrave Macmillan
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().