Market Sentiment and the Cross-section of Expected Stock Returns
43 Pages Posted: 10 Feb 2020
Date Written: January 16, 2020
We present evidence that market sentiment is positively priced in the cross-section of stock returns in low-sentiment periods. We estimate individual stock exposure to market sentiment and find that, in periods of low market sentiment, stocks in the highest sentiment beta quintile generate a 0.66% higher ex-post monthly return, on average, relative to stocks in the lowest sentiment beta quintile. However, this return spread is no longer significant in medium- or high-sentiment periods. This is consistent with asymmetric pricing wherein overpricing in high-sentiment periods is more prevalent than underpricing in low-sentiment periods due to short-sale constraints.
Keywords: Sentiment Risk; Stock Returns; Factor Model
JEL Classification: G12, G41
Suggested Citation: Suggested Citation