The Impact of Public Mood on the Cross-Section of Stock Returns

47 Pages Posted: 9 May 2018 Last revised: 30 Sep 2020

See all articles by Jiatao Liu

Jiatao Liu

Cass Business School

Ian W. Marsh

City University London - Sir John Cass Business School

Date Written: April 23, 2019

Abstract

This paper studies the impact of public mood, measured by Twitter messages, on the cross-section of U.S. stock returns. Our Twitter-based mood measure is free of endogeneity from financial market influence and distinct from the weather proxy or sentiment indices more commonly used in existing studies. We show that moody stocks that are more sensitive to public mood earn a higher expected excess return than less mood-sensitive sober stocks. Sorting stocks to construct the risk factor portfolio based on mood betas as sensitivity to mood risk, we are the first to quantify the risk premium (0.56% per month) by holding stocks subject to mood risk. Our results are consistent with the theoretical arguments that investors mistakenly use mood as information that biases investors' decision making and trading behaviors, thereby inducing mispricing in asset valuation.

Keywords: mood beta, sentiment, stock returns, risk premium, asset pricing

JEL Classification: G12, G14, G41

Suggested Citation

Liu, Jiatao and Marsh, Ian William, The Impact of Public Mood on the Cross-Section of Stock Returns (April 23, 2019). Available at SSRN: https://ssrn.com/abstract=3170954 or http://dx.doi.org/10.2139/ssrn.3170954

Jiatao Liu (Contact Author)

Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
Great Britain

Ian William Marsh

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 20 7040 5121 (Phone)
+44 20 7040 8881 (Fax)

HOME PAGE: http://www.cass.city.ac.uk/faculty/i.marsh

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