Sentiment and Uncertainty

97 Pages Posted: 15 May 2020 Last revised: 15 Nov 2022

See all articles by Justin Birru

Justin Birru

Ohio State University (OSU) - Department of Finance

Trevor Young

Tulane University - A.B. Freeman School of Business

Date Written: February 25, 2022

Abstract

Sentiment should exhibit its strongest effects on asset prices at times when valuations are most subjective. Accordingly, we show that a one-standard-deviation increase in aggregate uncertainty amplifies the predictive ability of sentiment for market returns by two to four times relative to when uncertainty is at its mean. For the cross-section of returns, the predictive ability of sentiment for test assets expected to be most sensitive to sentiment, including existing measures of both risk and mispricing, is substantially larger in times of higher uncertainty. The results hold for both daily and monthly proxies for sentiment and for various proxies for uncertainty.

Keywords: sentiment, uncertainty, market return predictability, cross-section of returns, anomalies, mispricing, behavioral finance

JEL Classification: G12, G14, D84

Suggested Citation

Birru, Justin and Young, Trevor, Sentiment and Uncertainty (February 25, 2022). Fisher College of Business Working Paper No. 2020-03-010, Charles A. Dice Working Paper No. 2020-10, Journal of Financial Economics (JFE), Vol. 146, No. 3, 2022, pages 1148-1169., Available at SSRN: https://ssrn.com/abstract=3601933 or http://dx.doi.org/10.2139/ssrn.3601933

Justin Birru (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Trevor Young

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

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