Investors’ Judgments, Asset Pricing Factors, and Sentiment

34 Pages Posted: 28 Apr 2014 Last revised: 24 Oct 2014

See all articles by Hersh Shefrin

Hersh Shefrin

Santa Clara University - Leavey School of Business

Date Written: October 2014

Abstract

This paper presents results based on new data showing that the relationships involving investors’ judgments of risk and variables such as beta, size, and book-to-market equity (B/M) have the same directional effects as those involving realized returns. Moreover, the relationships involving risk are mediated by Baker-Wurgler sentiment, with directional effects similar to those that have already been documented for realized returns. In this regard, Baker-Wurgler sentiment mediates the time series of investors’ judgments of expected return and the cross-section of their judgments about risk. The results are consistent with the position that investors’ judgments of risk and return, both mediated by sentiment, influence market prices.

Keywords: risk, sentiment, size, book-to-market, beta, representativeness, affect

JEL Classification: D03, G10, G12

Suggested Citation

Shefrin, Hersh, Investors’ Judgments, Asset Pricing Factors, and Sentiment (October 2014). Available at SSRN: https://ssrn.com/abstract=2429537 or http://dx.doi.org/10.2139/ssrn.2429537

Hersh Shefrin (Contact Author)

Santa Clara University - Leavey School of Business ( email )

Dept. of Finance
Santa Clara, CA 95053
United States
408-554-6893 (Phone)
408-554-4029 (Fax)

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