Investors’ Judgments, Asset Pricing Factors, and Sentiment
34 Pages Posted: 28 Apr 2014 Last revised: 24 Oct 2014
Date Written: October 2014
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: Suggested Citation