Investor Sentiment and the Mean-Variance Relation
47 Pages Posted: 19 Nov 2005 Last revised: 9 Mar 2011
Date Written: January 25, 2010
This study documents the influence of investor sentiment on the market's mean-variance tradeoff. We find that the stock market's expected excess return is positively related to the market's conditional variance in low-sentiment periods but unrelated to variance in high-sentiment periods. These findings are consistent with sentiment traders who, during the high-sentiment periods, undermine an otherwise positive mean-variance tradeoff. We also find that the negative correlation between returns and contemporaneous volatility innovations is much stronger in the low-sentiment periods. The latter result is consistent with the stronger positive ex ante relation during such periods.
Keywords: investor sentiment, mean-variance relation, volatility
JEL Classification: G12, G14
Suggested Citation: Suggested Citation