Cardiff University | Prifysgol Caerdydd ORCA
Online Research @ Cardiff 
WelshClear Cookie - decide language by browser settings

Investor sentiment and the cross-section of stock returns: New theory and evidence

Ding, Wenjie ORCID: https://orcid.org/0000-0003-2774-5777, Mazouz, Khelifa ORCID: https://orcid.org/0000-0001-6711-1715 and Wang, Qingwei ORCID: https://orcid.org/0000-0002-3695-7846 2019. Investor sentiment and the cross-section of stock returns: New theory and evidence. Review of Quantitative Finance and Accounting 53 , pp. 493-525. 10.1007/s11156-018-0756-z

[thumbnail of Ding2018_Article_InvestorSentimentAndTheCross-s.pdf]
Preview
PDF - Published Version
Available under License Creative Commons Attribution.

Download (1MB) | Preview

Abstract

We extend the noise trader risk model of Delong et al. (J Polit Econ 98:703–738, 1990) to a model with multiple risky assets to demonstrate the effect of investor sentiment on the cross-section of stock returns. Our model formally demonstrates that market-wide sentiment leads to relatively higher contemporaneous returns and lower subsequent returns for stocks that are more prone to sentiment and difficult to arbitrage. Our extended model is consistent with the existing empirical evidence on the relationship between sentiment and cross-sectional stock returns. Guided by the extended model, wen also decompose investor sentiment into long- and short-run components and predict that long-run sentiment negatively associates with the cross-sectional return and short-run sentiment positively varies with the cross-sectional return. Consistent with these predictions, we find a negative relationship between the long-run sentiment component and subsequent stock returns and positive association between the short-run sentiment component and contemporaneous stock returns.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Additional Information: This article is distributed under the terms of the Creative Commons Attribution 4.0 International License
Publisher: Springer Verlag
ISSN: 0924-865X
Date of First Compliant Deposit: 17 September 2018
Date of Acceptance: 15 August 2018
Last Modified: 12 Aug 2023 22:59
URI: https://orca.cardiff.ac.uk/id/eprint/114310

Citation Data

Cited 29 times in Scopus. View in Scopus. Powered By Scopus® Data

Actions (repository staff only)

Edit Item Edit Item

Downloads

Downloads per month over past year

View more statistics