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The sentiment premium and macroeconomic announcements

Author

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  • Ding Du

    (Northern Arizona University)

  • Ou Hu

    (Youngstown State University)

Abstract

Limits to arbitrage imply that market-wide investor sentiment should be a priced factor in the US equity market. While previous studies (Baker and Wurgler in J Financ 61:1645–1680, 2006) focus on the factor loading on market-wide investor sentiment, we study its factor premium in the present paper. This is important, because both factor loadings and premiums are required to estimate expected returns on stocks, which are essential for capital budgeting, portfolio evaluation, investment, and risk analysis decisions. If overpricing is more prevalent than underpricing (Stambaugh et al. in J Financ Econ 104:288–302, 2012), the premium on market-wide investor sentiment should be negative. Furthermore, the sentiment premium should be particularly significant on days without macroeconomic announcements, because there is a lack of information about the state of the economy at such times. We test these hypotheses in this paper, and find supporting evidence. Our findings have important theoretical as well as practical implications.

Suggested Citation

  • Ding Du & Ou Hu, 2018. "The sentiment premium and macroeconomic announcements," Review of Quantitative Finance and Accounting, Springer, vol. 50(1), pages 207-237, January.
    • Handle: RePEc:kap:rqfnac:v:50:y:2018:i:1:d:10.1007_s11156-017-0628-y
    DOI: 10.1007/s11156-017-0628-y
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    2. Wenjie Ding & Khelifa Mazouz & Qingwei Wang, 2019. "Investor sentiment and the cross-section of stock returns: new theory and evidence," Review of Quantitative Finance and Accounting, Springer, vol. 53(2), pages 493-525, August.
    3. Yao Zheng & Eric Osmer & Liancun Zheng, 2020. "Can mutual funds time investor sentiment?," Review of Quantitative Finance and Accounting, Springer, vol. 54(4), pages 1449-1486, May.
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    6. Alex YiHou Huang & Ming-Che Hu & Quang Thai Truong, 2021. "Asymmetrical impacts from overnight returns on stock returns," Review of Quantitative Finance and Accounting, Springer, vol. 56(3), pages 849-889, April.

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    More about this item

    Keywords

    Investor sentiment; Macroeconomic announcements; Cross-section of stock returns;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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