Investor Sentiment and the Cross-Section of Stock Returns
52 Pages Posted: 18 Nov 2003 Last revised: 13 Jan 2009
Date Written: November 2003
We study how investor sentiment affects the cross-section of stock returns. We predict that a wave of investor sentiment has larger effects on securities whose valuations are highly subjective and difficult to arbitrage. Consistent with this prediction, we find that when beginning-of-period proxies for sentiment are low, subsequent returns are relatively high for small stocks, young stocks, high volatility stocks, unprofitable stocks, non-dividend-paying stocks, extreme growth stocks, and distressed stocks. When sentiment is high, on the other hand, these stocks tend to earn relatively low subsequent returns.
Keywords: sentiment, cross-section, arbitrage, asset pricing
JEL Classification: G12, G14
Suggested Citation: Suggested Citation