Individual mean-variance relation and stock-level investor sentiment

Jun Sik Kim, Da-Hea Kim and Sung Won Seo

Journal of Business Economics and Management, 2017, vol. 18, issue 1, 20-34

Abstract: This research studies the effect of stock-level investor sentiment on individual stock returns’ mean-variance relation. Using unique buy and sell volume data of retail investors in Korean stock market, we find that a positive mean-variance relation is undermined among high-sentiment stocks, but holds among low-sentiment stocks. We adopt buy-sell imbalances of retail investors for individual stocks as a measure of stock-level investor sentiment. Further, our findings provide empirical evidence of a strong risk-return trade-off among stocks with low retail concentration (e.g., large capitalization, high-priced, and growth stocks). Existing research only analyzes market-wide investor sentiment. However, we study the effect of stock-level investor sentiment on individual stock returns. Therefore, our findings suggest novel implications about the investment strategy that the stock-level investor sentiment is important when constructing portfolios based on variance.

Date: 2017
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DOI: 10.3846/16111699.2016.1252794

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