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Value at risk, cross-sectional returns and the role of investor sentiment

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  • Bi, Jia
  • Zhu, Yifeng

Abstract

In this paper, we find that the relationship between the value-at-risk (VaR) and expected returns is negative and this negative relationship between the VaR and expected returns can be explained by volatility in the U.S. market. However, for different levels of investor sentiment, this relationship changes. For a high sentiment period, VaR is negatively related with the expected return and cannot be explained by momentum, short-term reversal, volatility, and financial distress. In comparison, the relation between the VaR and expected returns during a low sentiment period is mixed.

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  • Bi, Jia & Zhu, Yifeng, 2020. "Value at risk, cross-sectional returns and the role of investor sentiment," Journal of Empirical Finance, Elsevier, vol. 56(C), pages 1-18.
    • Handle: RePEc:eee:empfin:v:56:y:2020:i:c:p:1-18
    DOI: 10.1016/j.jempfin.2019.12.004
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    Cited by:

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    6. Lee, Jong Hwa & Sung, Taeyoon & Seo, Sung Won, 2022. "Investor sentiment, credit rating, and stock returns," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 1076-1092.
    7. Asgar Ali & K. N. Badhani, 2023. "Tail risk, beta anomaly, and demand for lottery: what explains cross-sectional variations in equity returns?," Empirical Economics, Springer, vol. 65(2), pages 775-804, August.
    8. He, Zhifang, 2023. "Geopolitical risks and investor sentiment: Causality and TVP-VAR analysis," The North American Journal of Economics and Finance, Elsevier, vol. 67(C).
    9. Hamidreza Arian & Hossein Poorvasei & Azin Sharifi & Shiva Zamani, 2020. "The Uncertain Shape of Grey Swans: Extreme Value Theory with Uncertain Threshold," Papers 2011.06693, arXiv.org.
    10. Eom, Cheoljun & Eom, Yunsung & Park, Jong Won, 2023. "Left-tail momentum and tail properties of return distributions: A case of Korea," International Review of Financial Analysis, Elsevier, vol. 87(C).
    11. Gui, Pingshu & Zhu, Yifeng, 2021. "Value at risk and the cross-section of expected returns: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 66(C).
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