Investor Sentiment and Asset Valuation

39 Pages Posted: 30 Nov 2001

See all articles by Michael T. Cliff

Michael T. Cliff

Analysis Group

Gregory W. Brown

University of North Carolina (UNC) at Chapel Hill - Finance Area

Date Written: November 19, 2001


The link between asset valuations and investor sentiment is the subject of considerable debate in the profession. We address this question by examining how survey data on investor sentiment relates to i) long-horizon returns, and ii) asset valuations. If excessive optimism drives prices above intrinsic values, periods of high sentiment should be followed by low returns as market prices revert to fundamental values. We find this to be the case for the overall stock market at horizons of two to three years. The relation is strongest for large-capitalization, low book-to-market (growth) portfolios. We also examine the relation between sentiment levels and deviations from intrinsic value. Using errors from an independent pricing model, we find sentiment is positively related to valuation errors using a variety of tests. All of our results are robust to the inclusion of other factors that have been shown to forecast stock returns, including past returns.

JEL Classification: G12

Suggested Citation

Cliff, Michael T. and Brown, Gregory W., Investor Sentiment and Asset Valuation (November 19, 2001). Available at SSRN: or

Michael T. Cliff

Analysis Group ( email )

800 17th St, N.W.
Suite 400
Washington, DC 20006
United States
(202) 530-2010 (Phone)

Gregory W. Brown (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

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