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The systematic pricing of market sentiment shock

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  • Samuel Xin Liang

Abstract

We show that market sentiment shocks create demand shocks for risky assets and a systematic risk for assets. We measure a market sentiment shock as the unexpected portion of the University of Michigan Consumer Sentiment Index’s growth. This shock prices stock returns in arbitrage pricing theory framework at 1% after controlling for market, size, value, momentum, and liquidity risk factors. Its premium lowered the implied risk aversion by 97.9% to 11.46 between 1978 and 2009 in our sentiment consumption-based capital-asset-pricing model. Merton’s [1973. “An Intertemporal Capital Asset Pricing Model.” Econometrica 41: 867–887]. intertemporal capital-asset-pricing model reconfirms our finding that this market sentiment shock is a systematic risk factor that provides investment opportunities.

Suggested Citation

  • Samuel Xin Liang, 2018. "The systematic pricing of market sentiment shock," The European Journal of Finance, Taylor & Francis Journals, vol. 24(18), pages 1835-1860, December.
    • Handle: RePEc:taf:eurjfi:v:24:y:2018:i:18:p:1835-1860
    DOI: 10.1080/1351847X.2018.1491875
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    Cited by:

    1. Yong Chen & Bing Han & Jing Pan, 2021. "Sentiment Trading and Hedge Fund Returns," Journal of Finance, American Finance Association, vol. 76(4), pages 2001-2033, August.
    2. F. Cavalli & A. Naimzada & N. Pecora & M. Pireddu, 2021. "Market sentiment and heterogeneous agents in an evolutive financial model," Journal of Evolutionary Economics, Springer, vol. 31(4), pages 1189-1219, September.
    3. Alomari, Mohammad & Al Rababa’a, Abdel Razzaq & El-Nader, Ghaith & Alkhataybeh, Ahmad & Ur Rehman, Mobeen, 2021. "Examining the effects of news and media sentiments on volatility and correlation: Evidence from the UK," The Quarterly Review of Economics and Finance, Elsevier, vol. 82(C), pages 280-297.
    4. Samuel Xin Liang & K.C. John Wei, 2020. "Market Volatility Risk and Stock Returns around the World: Implication for Multinational Corporations," International Review of Finance, International Review of Finance Ltd., vol. 20(4), pages 923-959, December.
    5. Yi, Shangkun & Wang, Jian & Wang, Xiaoting & Feng, Hongrui, 2022. "CEO political connection and stock sentiment beta: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 74(C).

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