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Sentiment and the cross‐section of expected stock returns

Author

Listed:
  • Gady Jacoby
  • Chi Liao
  • Nanying Lin
  • Lei Lu

Abstract

The asset pricing Literature suggests market sentiment is a state variable. This study shows that market sentiment is positively priced at the cross‐section of stock returns, conditional on aggregate investors’ sentiment. We estimate individual stock sentiment beta and find that, following low‐sentiment periods, stocks in the highest sentiment beta quintile generate a 0.74% higher monthly return than stocks in the lowest sentiment beta quintile. However, this return spread is insignificant following medium‐ or high‐sentiment periods. This finding is consistent with the argument that overpricing following high‐sentiment periods is more prevalent than underpricing following low‐sentiment periods due to short‐sale constraints.

Suggested Citation

  • Gady Jacoby & Chi Liao & Nanying Lin & Lei Lu, 2024. "Sentiment and the cross‐section of expected stock returns," The Financial Review, Eastern Finance Association, vol. 59(2), pages 459-485, May.
    • Handle: RePEc:bla:finrev:v:59:y:2024:i:2:p:459-485
    DOI: 10.1111/fire.12380
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