Is Sentiment Risk Priced By Stock Market?

Francisca Beer, Mohamad Watfa and Mohamed Zouaoui
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Francisca Beer: CSUSB - California State University [San Bernardino]
Mohamad Watfa: ITIC Paris - ITIC Paris
Mohamed Zouaoui: LEG - Laboratoire d'Economie et de Gestion - UB - Université de Bourgogne - CNRS - Centre National de la Recherche Scientifique, UFC - Université de Franche-Comté - UBFC - Université Bourgogne Franche-Comté [COMUE]

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Abstract: This study tests if the financial markets price the investors 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: Behavioral Finance; Investor Sentiment; Noise Trader Risk; Stock Returns (search for similar items in EconPapers)
Date: 2012-06
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Published in Journal of Applied Business Research, 2012, 28 (4), pp.683-700. ⟨10.19030/jabr.v28i4.7052⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01346767

DOI: 10.19030/jabr.v28i4.7052

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