The Effects of Sentiment on Market Return and Volatility and The Cross-Sectional Risk Premium of Sentiment-affected Volatility

Yan Yang () and Laurence Copeland ()
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Yan Yang: Cardiff Business School

No E2014/12, Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section

Abstract: We construct investor sentiment of UK stock market using the procedure of principal component analysis. Using sentiment-augmented EGARCH component model, we analyse the impacts of sentiment on market excess return, the permanent component of market volatility and the transitory component of market volatility. Bullish sentiment leads to higher market excess return while bearish sentiment leads to lower excess return. Sentiment-augmented EGARCH component model compares favourably to the original EGARCH component model which does not take investor sentiment into account. Furthermore, we test the cross-sectional risk premia of the permanent and transitory components of sentiment-affected volatility in the framework of ICAPM.

Keywords: investor sentiment; principal component analysis; EGARCH component model; ICAPM; cross-sectional risk premium (search for similar items in EconPapers)
JEL-codes: G12 G15 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2014-07
New Economics Papers: this item is included in nep-fmk
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Citations: View citations in EconPapers (1)

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