Investor Sentiment and the Mean-Variance Relation

47 Pages Posted: 19 Nov 2005 Last revised: 9 Mar 2011

Jianfeng Yu

University of Minnesota

Yu Yuan

Shanghai Advanced Institute of Finance; University of Pennsylvania - Wharton Financial Institutions Center

Date Written: January 25, 2010

Abstract

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

Yu, Jianfeng and Yuan, Yu, Investor Sentiment and the Mean-Variance Relation (January 25, 2010). Journal of Financial Economics (JFE), Vol. 100, pp. 367-381, 2011. Available at SSRN: https://ssrn.com/abstract=831487

Jianfeng Yu

University of Minnesota ( email )

321 19th Avenue
Suite 3-122
Minneapolis, MN 55455
United States

HOME PAGE: http://users.cla.umn.edu/~jianfeng/

Yu Yuan (Contact Author)

Shanghai Advanced Institute of Finance ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

HOME PAGE: http://www.saif.sjtu.edu.cn/facultylist/yyuan/

University of Pennsylvania - Wharton Financial Institutions Center

3733 Spruce Street
Philadelphia, PA 19104-6374
United States

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