Do Fund Investors Know that Risk is Sometimes Not Priced?

45 Pages Posted: 28 Aug 2012 Last revised: 20 Nov 2013

See all articles by Fabian Irek

Fabian Irek

Luxembourg School of Finance; University of Oxford - Said Business School

Thorsten Lehnert

University of Luxembourg

Date Written: November 1, 2013

Abstract

Previous research suggests that investor sentiment has an influence on the market's risk-return trade-off. Noise traders' demand for assets is considered to be risk independent and, as a result, risky assets do not offer a risk premium when demand is high. We show that market risk is only a priced factor of expected fund returns when investor sentiment is low. Furthermore, fund investors seem aware that risk is sometimes not priced. During high sentiment periods, "smart" investors buy safe funds that subsequently outperform and sell risky funds that subsequently underperform. Our results are statistically and economically significant.

JEL Classification: G11, G12, G23

Suggested Citation

Irek, Fabian and Lehnert, Thorsten, Do Fund Investors Know that Risk is Sometimes Not Priced? (November 1, 2013). Available at SSRN: https://ssrn.com/abstract=2136899 or http://dx.doi.org/10.2139/ssrn.2136899

Fabian Irek (Contact Author)

Luxembourg School of Finance ( email )

L-1511 Luxembourg
Luxembourg

HOME PAGE: http://www.lsf.lu

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

Thorsten Lehnert

University of Luxembourg ( email )

6, rue Coudenhove-Kalergi
Luxembourg, L-1359
Luxembourg

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
148
Abstract Views
1,374
rank
229,777
PlumX Metrics