Market Sentiment and the Cross-section of Expected Stock Returns

43 Pages Posted: 10 Feb 2020

See all articles by Gady Jacoby

Gady Jacoby

University of Manitoba - Department of Accounting and Finance; Seton Hall University

Chi Liao

University of Manitoba - Asper School of Business

Sheldon Lin

University of Manitoba - Asper School of Business

Lei Lu

Asper School of Business, University of Manitoba

Date Written: January 16, 2020

Abstract

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

Jacoby, Gady and Liao, Chi and Lin, Sheldon and Lu, Lei, Market Sentiment and the Cross-section of Expected Stock Returns (January 16, 2020). Available at SSRN: https://ssrn.com/abstract=3521013 or http://dx.doi.org/10.2139/ssrn.3521013

Gady Jacoby

University of Manitoba - Department of Accounting and Finance

Faculty of Management
Winnipeg, MB R3T 5V4
Canada

Seton Hall University ( email )

400 S Orange Avenue
South Orange, NJ 07079
United States

Chi Liao

University of Manitoba - Asper School of Business ( email )

181 Freedman Crescent
Winnipeg, Manitoba R3T 5V4
Canada

Sheldon Lin

University of Manitoba - Asper School of Business ( email )

181 Freedman Crescent
Winnipeg, Manitoba R3T 5V4
Canada

Lei Lu (Contact Author)

Asper School of Business, University of Manitoba ( email )

181 Freedman Crescent
Winnipeg, Manitoba R3T 5V4
Canada

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