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Is Sentiment Risk Priced by Stock Market?

Author

Listed:
  • Francisca Beer

    (California State University of San Bernardino)

  • Mohamed Wafta

    (ITIC Paris)

  • Mohamed Zouaoui

    (University of Franche-Comté LEG (FARGO)-UMR 5118)

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.

Suggested Citation

  • Francisca Beer & Mohamed Wafta & Mohamed Zouaoui, 2011. "Is Sentiment Risk Priced by Stock Market?," Working Papers CREGO 1110502, Université de Bourgogne - CREGO EA7317 Centre de recherches en gestion des organisations.
    • Handle: RePEc:dij:wpfarg:1110502
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    More about this item

    Keywords

    investor sentiment; stock returns; noise trader risk;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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