Abstract

http://ssrn.com/abstract=983435
 
 

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Investor Sentiment in the Stock Market


Malcolm P. Baker


Harvard Business School; National Bureau of Economic Research (NBER)

Jeffrey Wurgler


NYU Stern School of Business; National Bureau of Economic Research (NBER)


Journal of Economic Perspectives, Vol. 21, No. 2, pp. 129-151, Spring 2007

Abstract:     
Real investors and markets are too complicated to be neatly summarized by a few selected biases and trading frictions. The "top down" approach to behavioral finance focuses on the measurement of reduced form, aggregate sentiment and traces its effects to stock returns. It builds on the two broader and more irrefutable assumptions of behavioral finance - sentiment and the limits to arbitrage - to explain which stocks are likely to be most affected by sentiment. In particular, stocks of low capitalization, younger, unprofitable, high volatility, non-dividend paying, growth companies, or stocks of firms in financial distress, are likely to be disproportionately sensitive to broad waves of investor sentiment. We review the theoretical and empirical evidence for these predictions.

Keywords: sentiment, stocks returns, sentiment index, bubble, crash

JEL Classification: G12, G14, E32

Accepted Paper Series


Not Available For Download

Date posted: April 30, 2007 ; Last revised: January 12, 2009

Suggested Citation

Baker, Malcolm P. and Wurgler, Jeffrey, Investor Sentiment in the Stock Market. Journal of Economic Perspectives, Vol. 21, No. 2, pp. 129-151, Spring 2007. Available at SSRN: http://ssrn.com/abstract=983435

Contact Information

Malcolm P. Baker
Harvard Business School ( email )
Boston, MA 02163
United States
617-495-6566 (Phone)
HOME PAGE: http://www.people.hbs.edu/mbaker
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Jeffrey A. Wurgler (Contact Author)
NYU Stern School of Business ( email )
Stern School of Business
44 West 4th Street, Suite 9-190
New York, NY 10012-1126
United States
212-998-0367 (Phone)
212-995-4233 (Fax)
HOME PAGE: http://www.stern.nyu.edu/~jwurgler/
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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