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Sentiment and Uncertainty

Author

Listed:
  • Birru, Justin

    (Ohio State U)

  • Young, Trevor

    (London Business School)

Abstract

Sentiment should exhibit its strongest effects on asset prices at times when valuations are most subjective. Consistent with this hypothesis, we show that a one-standard-deviation increase in aggregate uncertainty amplifies the predictive ability of sentiment for market returns by two to four times relative to when uncertainty is at its mean. We find similar evidence for the cross-section of returns; the predictive ability of sentiment for returns of test assets expected to be most sensitive to sentiment and for anomaly returns is substantially larger in times of higher uncertainty. The results hold for both daily and monthly proxies for sentiment and for various proxies for uncertainty. The evidence sheds light on one component of time-series variation in mispricing and suggests that the effects of sentiment are greatest in times of higher uncertainty.

Suggested Citation

  • Birru, Justin & Young, Trevor, 2020. "Sentiment and Uncertainty," Working Paper Series 2020-10, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    • Handle: RePEc:ecl:ohidic:2020-10
    DOI: 10.2139/ssrn.3601933
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    Cited by:

    1. Maaz Khan & Umar Nawaz Kayani & Mrestyal Khan & Khurrum Shahzad Mughal & Mohammad Haseeb, 2023. "COVID-19 Pandemic & Financial Market Volatility; Evidence from GARCH Models," JRFM, MDPI, vol. 16(1), pages 1-20, January.
    2. Douglas de Medeiros Franco, 2022. "Expectations, Economic Uncertainty, and Sentiment," RAC - Revista de Administração Contemporânea (Journal of Contemporary Administration), ANPAD - Associação Nacional de Pós-Graduação e Pesquisa em Administração, vol. 26(5), pages 210029-2100.
    3. Li, Yue & W. Goodell, John & Shen, Dehua, 2021. "Does happiness forecast implied volatility? Evidence from nonparametric wave-based Granger causality testing," The Quarterly Review of Economics and Finance, Elsevier, vol. 81(C), pages 113-122.

    More about this item

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • 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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