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Investors' Judgments, Asset Pricing Factors and Sentiment

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  • Hersh Shefrin

Abstract

This paper presents results based on new data showing that the relationships involving investors' judgments of risk and variables such as beta, size, and book†to†market equity (B/M) have the same directional effects as those involving realised returns. Moreover, the relationships involving risk are mediated by Baker–Wurgler sentiment, with directional effects similar to those that have already been documented for realised returns. In this regard, Baker†Wurgler sentiment mediates the time series of investors' judgments of expected return and the cross†section of their judgments about risk. The results are consistent with the position that investors' judgments of risk and return, both mediated by sentiment, influence market prices.

Suggested Citation

  • Hersh Shefrin, 2015. "Investors' Judgments, Asset Pricing Factors and Sentiment," European Financial Management, European Financial Management Association, vol. 21(2), pages 205-227, March.
    • Handle: RePEc:bla:eufman:v:21:y:2015:i:2:p:205-227
    DOI: 10.1111/eufm.12059
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    References listed on IDEAS

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    1. Malcolm Baker & Jeffrey Wurgler, 2006. "Investor Sentiment and the Cross‐Section of Stock Returns," Journal of Finance, American Finance Association, vol. 61(4), pages 1645-1680, August.
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    3. Ganzach, Yoav, 2000. "Judging Risk and Return of Financial Assets," Organizational Behavior and Human Decision Processes, Elsevier, vol. 83(2), pages 353-370, November.
    4. Alon Brav & Reuven Lehavy, 2003. "An Empirical Analysis of Analysts' Target Prices: Short-term Informativeness and Long-term Dynamics," Journal of Finance, American Finance Association, vol. 58(5), pages 1933-1968, October.
    5. Malcolm Baker & Jeffrey Wurgler, 2007. "Investor Sentiment in the Stock Market," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 129-152, Spring.
    6. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    7. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. "Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
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    Cited by:

    1. Kees G. Koedijk & Alfred M.H. Slager & Philip A. Stork, 2016. "Investing in Systematic Factor Premiums," European Financial Management, European Financial Management Association, vol. 22(2), pages 193-234, March.
    2. Yiannis Karavias & Stella Spilioti & Elias Tzavalis, 2021. "Investor sentiment effects on share price deviations from their intrinsic values based on accounting fundamentals," Review of Quantitative Finance and Accounting, Springer, vol. 56(4), pages 1593-1621, May.
    3. Ham, Hyuna & Ryu, Doojin & Webb, Robert I., 2022. "The effects of overnight events on daytime trading sessions," International Review of Financial Analysis, Elsevier, vol. 83(C).
    4. Boussaidi, Ramzi & AlSaggaf, Majid Ibrahim, 2022. "Contrarian profits and representativeness heuristic in the MENA stock markets," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 97(C).

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