Investor Sentiment and the Cross-Section of Stock Returns

Journal of Finance, Vol. 61, No. 4, pp. 1645-1680, August 2006

Posted: 20 Apr 2005 Last revised: 13 Jan 2009

See all articles by Malcolm P. Baker

Malcolm P. Baker

Harvard Business School; National Bureau of Economic Research (NBER)

Jeffrey Wurgler

NYU Stern School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 6 versions of this paper

Abstract

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, asset pricing, arbitrage, cross-section

JEL Classification: G12

Suggested Citation

Baker, Malcolm P. and Wurgler, Jeffrey A., Investor Sentiment and the Cross-Section of Stock Returns. Journal of Finance, Vol. 61, No. 4, pp. 1645-1680, August 2006. Available at SSRN: https://ssrn.com/abstract=703461

Malcolm P. Baker

Harvard Business School ( email )

Boston, MA 02163
United States
617-495-6566 (Phone)

HOME PAGE: http://www.people.hbs.edu/mbaker

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jeffrey A. Wurgler (Contact Author)

NYU Stern School of Business ( email )

Stern School of Business
44 West 4th Street, Suite 9-190
New York, NY 10012-1126
United States
212-998-0367 (Phone)
212-995-4233 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~jwurgler/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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