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Investor Sentiment and the Cross-Section of Stock Returns

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Author Info
MALCOLM BAKER
JEFFREY WURGLER

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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 categories of stock earn relatively low subsequent returns. Copyright 2006 by The American Finance Association.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6261.2006.00885.x
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Publisher Info
Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 61 (2006)
Issue (Month): 4 (08)
Pages: 1645-1680
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Handle: RePEc:bla:jfinan:v:61:y:2006:i:4:p:1645-1680

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References listed on IDEAS
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Hirshleifer, David & Jiang, Danling, 2007. "Commonality in Misvaluation, Equity Financing, and the Cross Section of Stock Returns," MPRA Paper 16134, University Library of Munich, Germany, revised 08 Jul 2009. [Downloadable!]
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    Other versions:
  3. Thomas Philippon & Yuliy Sannikov, 2007. "Real Options in a Dynamic Agency Model, with Applications to Financial Development, IPOs, and Business Risk," NBER Working Papers 13584, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Jiang, Danling, 2008. "Cross-Sectional Dispersion of Firm Valuations and Expected Stock Returns," MPRA Paper 8325, University Library of Munich, Germany. [Downloadable!]
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  7. Doran, James & Jiang, Danling & Peterson, David, 2007. "Short-Sale Constraints and the Idiosyncratic Volatility Puzzle: An Event Study Approach," MPRA Paper 4995, University Library of Munich, Germany, revised 02 Feb 2009. [Downloadable!]
  8. Ramadorai, Tarun, 2008. "The Secondary Market for Hedge Funds and the Closed-Hedge Fund Premium," CEPR Discussion Papers 6877, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  10. Kim, KiHyung, 2007. "The Investors’ Implied Sentiment : A Robust Measure of Risk Appetite," MPRA Paper 5714, University Library of Munich, Germany. [Downloadable!]
  11. Mihir Desai & William M. Gentry, 2003. "The Character and Determinants of Corporate Capital Gains," NBER Working Papers 10153, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Schmeling, Maik, 2008. "Investor sentiment and stock returns: Some international evidence," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover dp-407, Universität Hannover, Wirtschaftswissenschaftliche Fakultät. [Downloadable!]
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  14. Lily Qiu & Ivo Welch, 2004. "Investor Sentiment Measures," NBER Working Papers 10794, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  15. Kai Li, 2004. "The Growth of Global Equity Markets: A Closer Look," Econometric Society 2004 North American Winter Meetings 54, Econometric Society. [Downloadable!]
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  17. Jiang, Danling, 2006. "Investor Overreaction, Cross-Sectional Dispersion of Firm Valuations, and Expected Stock Returns," Working Paper Series 2006-8, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
  18. Menkhoff, Lukas & Rebitzky, Rafael, 2007. "Investor sentiment in the US-dollar: longer-term, nonlinear orientation on PPP," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover dp-376, Universität Hannover, Wirtschaftswissenschaftliche Fakultät. [Downloadable!]
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  19. Stephen Satchel & Vincenzo Merella, 2006. "Valuation of Options in a Setting with Happiness-Augmented Preferences," Research Paper Series 182, Quantitative Finance Research Centre, University of Technology, Sydney. [Downloadable!]
  20. Geert Bekaert & Marie Hoerova & Martin Scheicher, 2009. "What Do Asset Prices Have to Say About Risk Appetite and Uncertainty?," Working Paper Series 1037, European Central Bank. [Downloadable!]
  21. Schmitz, Philipp & Glaser, Markus & Weber, Martin, 2006. "Individual Investor Sentiment and Stock Returns - What Do We Learn from Warrant Traders?," Sonderforschungsbereich 504 Publications 06-12, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim. [Downloadable!]
  22. Tang, Dragon Yongjun & Yan, Hong, 2008. "Market conditions, default risk and credit spreads," Discussion Paper Series 2: Banking and Financial Studies 2008,08, Deutsche Bundesbank, Research Centre. [Downloadable!]
  23. Xavier Gabaix, 2008. "Variable Rare Disasters: An Exactly Solved Framework for Ten Puzzles in Macro-Finance," NBER Working Papers 13724, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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