Investor Sentiment and the Cross-Section of Stock Returns

Abstract:     
We study how investor sentiment affects the cross-section of stock returns. We predict that a wave of investor sentiment has larger effects on securities whose valuations are highly subjective and difficult to arbitrage. Consistent with this prediction, we find that when beginning-of-period proxies for sentiment are low, subsequent returns are relatively high for small stocks, young stocks, high volatility stocks, unprofitable stocks, non-dividend-paying stocks, extreme growth stocks, and distressed stocks. When sentiment is high, on the other hand, these stocks tend to earn relatively low subsequent returns.

Number of Pages in PDF File: 52

Keywords: sentiment, cross-section, arbitrage, asset pricing

JEL Classification: G12, G14

working papers series