Investor Sentiment, Anomalies, and Macroeconomic Conditions
Asia-Pacific Journal of Financial Studies, Vol.47(6), Dec 2018, pp.751-804
64 Pages Posted: 5 Jul 2015 Last revised: 2 Jan 2019
Date Written: September 30, 2018
Abstract
We examine whether the results supporting the sentiment-related overpricing story by Stambaugh, Yu, and Yuan (J. Financial Economics, v.104, p.288-302) is still valid after controlling for macroeconomic conditions. We no longer find the results consistent with the sentiment-related overpricing story after adjusting for the effect of macroeconomic conditions. The risk factors associated with macroeconomic conditions are mostly priced and the average return spread in the anomalies is largely accounted for by the expected return spread implied by the risk factors. Their results might be a consequence of the use of an inadequately constructed sentiment index. It is premature to argue that the returns in the anomalies are driven by investor sentiment.
Keywords: Investor sentiment; Anomalies; Risk factors; Macroeconomic variables; Sentiment-related overpricing
JEL Classification: G12; G14
Suggested Citation: Suggested Citation