Is Sentiment Risk Priced by Stock Market?

Francisca Beer (), Mohamed Wafta and Mohamed Zouaoui ()
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Francisca Beer: California State University of San Bernardino
Mohamed Wafta: ITIC Paris
Mohamed Zouaoui: University of Franche-Comté LEG (FARGO)-UMR 5118

Working Papers CREGO from Université de Bourgogne - CREGO EA7317 Centre de recherches en gestion des organisations

Abstract: This study tests if the financial markets price the investor’s sentiment risk. We construct portfolios based upon the stock returns’ exposure to sentiment. Our results show that the portfolio returns are positively correlated with the exposure of stocks to sentiment. The strategy that consists of buying stocks with the highest exposure to sentiment and selling stocks with the lowest exposure to sentiment generates a significant raw profit. Exploring the sources of profit, we find that neither the traditional risk factors nor the momentum factor can account for the profit. However, we find that the addition of the sentiment risk premium contributes to explain the profit.

Keywords: investor sentiment; stock returns; noise trader risk (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2011-05
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