Investor Sentiment and the Mean-Variance Relation
University of Minnesota
Shanghai Advanced Institute of Finance; University of Pennsylvania - Wharton Financial Institutions Center
January 25, 2010
Journal of Financial Economics (JFE), Vol. 100, pp. 367-381, 2011
This study documents the influence of investor sentiment on the market's mean-variance tradeoff. We find that the stock market's expected excess return is positively related to the market's conditional variance in low-sentiment periods but unrelated to variance in high-sentiment periods. These findings are consistent with sentiment traders who, during the high-sentiment periods, undermine an otherwise positive mean-variance tradeoff. We also find that the negative correlation between returns and contemporaneous volatility innovations is much stronger in the low-sentiment periods. The latter result is consistent with the stronger positive ex ante relation during such periods.
Number of Pages in PDF File: 47
Keywords: investor sentiment, mean-variance relation, volatility
JEL Classification: G12, G14
Date posted: November 19, 2005 ; Last revised: March 9, 2011
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