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Do Investors Care About Noise Trader Risk?

Author

Listed:
  • Francisca Beer

    (CSUSB - California State University [San Bernardino])

  • Mohamad Watfa

    (ITIC Paris - ITIC Paris)

  • Mohamed Zouaoui

    (IAE Franche Comté - Institut d'Administration des Entreprises de Franche Comté - Besançon - UFR SJEPG - UFR de Sciences juridiques, économiques, politiques et de gestion - UFC - Université de Franche-Comté - UBFC - Université Bourgogne Franche-Comté [COMUE], LEG - Laboratoire d'Economie et de Gestion - UB - Université de Bourgogne - CNRS - Centre National de la Recherche Scientifique)

Abstract

The link between investor sentiment and asset valuation is at the center of a long-running debate in behavioral finance. Using a new composite sentiment indicator, we show that the conventional risk does not explain the abnormal returns of portfolios most sensitive to the sentiment factor. Our result supports the existence of a sentiment risk valued by financial markets. We also find that the firms more impacted by the sentiment risk correspond to difficult-to-arbitrage and hard-to-value stocks, e.g. small stocks, growth stocks, young stocks, unprofitable stocks, lower dividend-paying stocks, intangible stocks and high volatility stocks.

Suggested Citation

  • Francisca Beer & Mohamad Watfa & Mohamed Zouaoui, 2012. "Do Investors Care About Noise Trader Risk?," Post-Print hal-01347113, HAL.
  • Handle: RePEc:hal:journl:hal-01347113
    as

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