Market Sentiment and the Cross-section of Expected Stock Returns

55 Pages Posted: 10 Feb 2020 Last revised: 12 Sep 2022

See all articles by Gady Jacoby

Gady Jacoby

College of Management Academic Studies; University of Manitoba - Department of Accounting and Finance; Seton Hall University

Chi Liao

University of Manitoba - Asper School of Business

Nanying Lin

Lyon College

Lei Lu

Asper School of Business, University of Manitoba

Date Written: September 11, 2022

Abstract

Kozak, Nagel, and Santosh (2018) present a theory that suggests market sentiment is a state variable. This study presents evidence that market sentiment is positively priced in the cross-section of stock returns, conditional on aggregate investor sentiment levels. We estimate individual stock exposure to market sentiment and find that, following periods of low market sentiment, stocks in the highest sentiment beta quintile generate a 0.74% higher ex-post monthly return than stocks in the lowest sentiment beta quintile. However, this return spread is not significant following medium- or high-sentiment periods. This finding is consistent with the argument that overpricing following high-sentiment periods is more prevalent than underpricing following low-sentiment periods due to short-sale constraints.

Keywords: Sentiment Risk, Sentiment Beta, Stock Returns, Short-sale Constraints

JEL Classification: G12, G41

Suggested Citation

Jacoby, Gady and Jacoby, Gady and Liao, Chi and Lin, Nanying and Lu, Lei, Market Sentiment and the Cross-section of Expected Stock Returns (September 11, 2022). Available at SSRN: https://ssrn.com/abstract=3521013 or http://dx.doi.org/10.2139/ssrn.3521013

Gady Jacoby

College of Management Academic Studies ( email )

Elie Wiesel St 2
Rishon LeTsiyon
Israel

Seton Hall University ( email )

400 S Orange Avenue
South Orange, NJ 07079
United States

University of Manitoba - Department of Accounting and Finance

Faculty of Management
Winnipeg, MB R3T 5V4
Canada

Chi Liao

University of Manitoba - Asper School of Business ( email )

181 Freedman Crescent
Winnipeg, Manitoba R3T 5V4
Canada

Nanying Lin

Lyon College ( email )

2300 Highland Rd.
Batesville
Batesville, AR Arkansas 72501
United States
8708341927 (Phone)

Lei Lu (Contact Author)

Asper School of Business, University of Manitoba ( email )

181 Freedman Crescent
Winnipeg, Manitoba R3T 5V4
Canada

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