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The impact of individual and institutional investor sentiment on the market price of risk

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  • Verma, Rahul
  • Soydemir, Gökçe

Abstract

We examine the effect of individual and institutional investor sentiment on the market price of risk derived from DJIA and S&P500 index returns. Consistent with behavioral asset pricing models, we find significant positive response of rational sentiment suggesting greater incentive for rational investors to engage in arbitrage when the compensation for taking risk is greater. Further, an increase in irrational optimism leads to a significant downward movement, but an increase in rational sentiment does not lead to a significant change market price of risk. These results are robust for both market indexes, DJIA and S&P500 and for both individual and institutional investor sentiment.

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Bibliographic Info

Article provided by Elsevier in its journal The Quarterly Review of Economics and Finance.

Volume (Year): 49 (2009)
Issue (Month): 3 (August)
Pages: 1129-1145

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Handle: RePEc:eee:quaeco:v:49:y:2009:i:3:p:1129-1145

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Web page: http://www.elsevier.com/locate/inca/620167

Related research

Keywords: Stock returns Investor sentiment VAR model;

References

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Citations

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Cited by:
  1. Yang, Chunpeng & Zhang, Rengui, 2014. "Dynamic sentiment asset pricing model," Economic Modelling, Elsevier, vol. 37(C), pages 362-367.
  2. Yang, Chunpeng & Zhang, Rengui, 2013. "Dynamic asset pricing model with heterogeneous sentiments," Economic Modelling, Elsevier, vol. 33(C), pages 248-253.
  3. Berger, Dave & Turtle, H.J., 2012. "Cross-sectional performance and investor sentiment in a multiple risk factor model," Journal of Banking & Finance, Elsevier, vol. 36(4), pages 1107-1121.
  4. Emrah İ. Çevik & Turhan Korkmaz & Erdal Atukeren, 2012. "Business confidence and stock returns in the USA: a time-varying Markov regime-switching model," Applied Financial Economics, Taylor & Francis Journals, vol. 22(4), pages 299-312, February.

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