Do Investors Care About Noise Trader Risk?

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: IAE Franche Comté - Institut d'Administration des Entreprises de Franche Comté - Besançon - UFR SJEPG - UFR de Sciences juridiques, économiques, politiques et de gestion - UFC - Université de Franche-Comté - UBFC - Université Bourgogne Franche-Comté [COMUE], LEG - Laboratoire d'Economie et de Gestion - UB - Université de Bourgogne - CNRS - Centre National de la Recherche Scientifique

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Abstract: The link between investor sentiment and asset valuation is at the center of a long-running debate in behavioral finance. Using a new composite sentiment indicator, we show that the conventional risk does not explain the abnormal returns of portfolios most sensitive to the sentiment factor. Our result supports the existence of a sentiment risk valued by financial markets. We also find that the firms more impacted by the sentiment risk correspond to difficult-to-arbitrage and hard-to-value stocks, e.g. small stocks, growth stocks, young stocks, unprofitable stocks, lower dividend-paying stocks, intangible stocks and high volatility stocks.

Keywords: Behavioral Finance; investor; sentiment indicator (search for similar items in EconPapers)
Date: 2012
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Published in The Capco Institute Journal of Financial transformation, 2012, 35, pp.48-56

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01347113

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