Investor Sentiment and Stock Return: Do Industries Matter?

Saumya Ranjan Dash and Jitendra Mahakud
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Saumya Ranjan Dash: The authors are at the Department of Humanities and Social Sciences, Indian Institute of Technology, Kharagpur. Saumya Ranjan Dash (the corresponding author) is Assistant Professor of Finance at Institute of Management Technology (IMT) Ghaziabad, India, email: sdash@imt.ediu and dash_saumya07@yahoo.co.in
Jitendra Mahakud: Jitendra Mahakud is Associate Professor of Economics and Finance, Department of Humanities and Social Sciences, Indian Institute of Technology Kharagpur, email: jmahakud@hss.iitkgp.ernet.in and jmahakud@yahoo.com

Margin: The Journal of Applied Economic Research, 2013, vol. 7, issue 3, 315-349

Abstract: The basic objective of this article is to evaluate the pricing implications of market-wide investor sentiment risk for cross-sectional return variations of Indian listed companies across industry groups. A multivariate time-series regression approach has been used to examine the impact of sentiment risk on stock return behaviour in the presence of other market-wide systematic risk factors. Our results suggest that the role of sentiment risk in the determination of a cross-section of stock returns is not uniform across the test asset portfolios formed on the basis of size, book-to-market equity, liquidity and momentum characteristics. For all portfolios, the impact of sentiment risk on the cross-section of stock returns behaviour has been disproportionately negative. The effect holds even after controlling for systematic market-wide risk factors. Although the impact of sentiment risk on industry-shorted portfolio returns persists in accordance with the theoretical argument, the cross-sectional variation with respect to different industries has been heavily dependent on the availability of stocks in that particular industry. The commonality of the sentiment effect across industry is not similar, as it is for the aggregate market. The results suggest that generalisation of the hard-to-value and difficult-to-arbitrage argument must be judged with caution, keeping the industry effects in mind. JEL Classification: GI,G12,G14

Keywords: Sentiment Risk; Multi Factor Model; Liquidity Risk; Momentum Strategy; Stock Return (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:sae:mareco:v:7:y:2013:i:3:p:315-349

DOI: 10.1177/0973801013491530

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