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Investor sentiment and the mean-variance relation

  • Yu, Jianfeng
  • Yuan, Yu
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This study shows the influence of investor sentiment on the market's mean-variance tradeoff. We find that the stock market's expected excess return is positively related to the market's conditional variance in low-sentiment periods but unrelated to variance in high-sentiment periods. These findings are consistent with sentiment traders who, during the high-sentiment periods, undermine an otherwise positive mean-variance tradeoff. We also find that the negative correlation between returns and contemporaneous volatility innovations is much stronger in the low-sentiment periods. The latter result is consistent with the stronger positive ex ante relation during such periods.

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File URL: http://www.sciencedirect.com/science/article/B6VBX-51921BK-2/2/fa0325b2c3df176101e73f0941745c51
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Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 100 (2011)
Issue (Month): 2 (May)
Pages: 367-381

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Handle: RePEc:eee:jfinec:v:100:y:2011:i:2:p:367-381
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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