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Time-Varying Market Price of Risk and Investor Sentiment: Evidence from a Multivariate GARCH Model

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  • David W. Johnk
  • Gökçe Soydemir

Abstract

We test a conditional version of the CAPM in the U.S. equity market using a parsimonious generalized autoregressive conditional heteroskedasticity (GARCH) model in which the risk premia, betas, and correlations vary through time. We introduce U.S. investor sentiment from two surveys as conditional information variables, whereas previous studies generally use economic fundamentals. We assume that investor sentiment is not entirely irrational and decompose it into its irrational and rational components; using the irrational components as information variables. We find that irrational investor sentiment measures are statistically significant, and contain information which may be valuable in asset pricing models.

Suggested Citation

  • David W. Johnk & Gökçe Soydemir, 2015. "Time-Varying Market Price of Risk and Investor Sentiment: Evidence from a Multivariate GARCH Model," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 16(2), pages 105-119, April.
    • Handle: RePEc:taf:hbhfxx:v:16:y:2015:i:2:p:105-119
    DOI: 10.1080/15427560.2015.1034856
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    Cited by:

    1. Daniel Huerta-Sanchez & Diego Escobari, 2018. "Changes in sentiment on REIT industry excess returns and volatility," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 32(3), pages 239-274, August.
    2. Diego Escobari & Mohammad Jafarinejad, 2019. "Investors’ Uncertainty and Stock Market Risk," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 20(3), pages 304-315, July.
    3. Mariano González-Sánchez & M. Encina Morales de Vega, 2021. "Influence of Bloomberg’s Investor Sentiment Index: Evidence from European Union Financial Sector," Mathematics, MDPI, vol. 9(4), pages 1-21, February.

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