Investor Sentiment in the Stock Market

38 Pages Posted: 3 Jul 2007 Last revised: 17 Jul 2022

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 4 versions of this paper

Date Written: June 2007

Abstract

Real investors and markets are too complicated to be neatly summarized by a few selected biases and trading frictions. The "top down" approach to behavioral finance focuses on the measurement of reduced form, aggregate sentiment and traces its effects to stock returns. It builds on the two broader and more irrefutable assumptions of behavioral finance -- sentiment and the limits to arbitrage -- to explain which stocks are likely to be most affected by sentiment. In particular, stocks of low capitalization, younger, unprofitable, high volatility, non-dividend paying, growth companies, or stocks of firms in financial distress, are likely to be disproportionately sensitive to broad waves of investor sentiment. We review the theoretical and empirical evidence for these predictions.

Suggested Citation

Baker, Malcolm P. and Wurgler, Jeffrey A., Investor Sentiment in the Stock Market (June 2007). NBER Working Paper No. w13189, Available at SSRN: https://ssrn.com/abstract=997545

Malcolm P. Baker (Contact Author)

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Jeffrey A. Wurgler

NYU Stern School of Business ( email )

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