Investors' Judgments, Asset Pricing Factors and Sentiment

23 Pages Posted: 13 Mar 2015

See all articles by Hersh Shefrin

Hersh Shefrin

Santa Clara University - Leavey School of Business

Date Written: March 2015

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 realised returns. Moreover, the relationships involving risk are mediated by Baker–Wurgler sentiment, with directional effects similar to those that have already been documented for realised 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

Suggested Citation

Shefrin, Hersh, Investors' Judgments, Asset Pricing Factors and Sentiment (March 2015). European Financial Management, Vol. 21, Issue 2, pp. 205-227, 2015. Available at SSRN: https://ssrn.com/abstract=2577046 or http://dx.doi.org/10.1111/eufm.12059

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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