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The Role of Market Sentiment in Asset Allocations and Stock Returns

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  • Jitka Hilliard
  • Arun Narayanasamy
  • Shen Zhang

Abstract

The authors investigate the role of mutual fund flows in incorporating market sentiment into asset prices. They show that retail investors adjust their investments among mutual fund categories in response to changes in market sentiment. Consistent with sentiment-induced price pressure through fund flows, they further find that firms favored by mutual funds, such as large-cap, dividend payers, and firms with high institutional ownership are sensitive to market sentiment. The authors construct a pricing factor representing sentiment risk and find that the sentiment factor is significant in standard asset pricing models and robust to various sorting procedure.

Suggested Citation

  • Jitka Hilliard & Arun Narayanasamy & Shen Zhang, 2020. "The Role of Market Sentiment in Asset Allocations and Stock Returns," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 21(4), pages 423-441, October.
    • Handle: RePEc:taf:hbhfxx:v:21:y:2020:i:4:p:423-441
    DOI: 10.1080/15427560.2019.1663854
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    Cited by:

    1. VDMV Lakshmi & Garima Sisodia & Anto Joseph & Aviral Kumar Tiwari, 2024. "The conditional impact of market conditions, volatility and liquidity shocks on the arbitrage opportunities during pre‐COVID and COVID periods," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(3), pages 3007-3022, July.

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