The sentiment premium and macroeconomic announcements

Ding Du, Ou Hu

Research output: Contribution to journalArticle

3 Citations (Scopus)

Abstract

Limits to arbitrage imply that market-wide investor sentiment should be a priced factor in the US equity market. While previous studies (Baker and Wurgler in J Financ 61:1645–1680, 2006) focus on the factor loading on market-wide investor sentiment, we study its factor premium in the present paper. This is important, because both factor loadings and premiums are required to estimate expected returns on stocks, which are essential for capital budgeting, portfolio evaluation, investment, and risk analysis decisions. If overpricing is more prevalent than underpricing (Stambaugh et al. in J Financ Econ 104:288–302, 2012), the premium on market-wide investor sentiment should be negative. Furthermore, the sentiment premium should be particularly significant on days without macroeconomic announcements, because there is a lack of information about the state of the economy at such times. We test these hypotheses in this paper, and find supporting evidence. Our findings have important theoretical as well as practical implications.

Original languageEnglish (US)
Pages (from-to)1-31
Number of pages31
JournalReview of Quantitative Finance and Accounting
DOIs
StateAccepted/In press - Mar 23 2017

Fingerprint

Sentiment
Premium
Macroeconomic announcements
Investor sentiment
Factor loadings
Factors
Capital budgeting
Expected returns
Limits to arbitrage
Hypothesis test
Investment analysis
Underpricing
Risk analysis
Equity markets
Evaluation

Keywords

  • Cross-section of stock returns
  • Investor sentiment
  • Macroeconomic announcements

ASJC Scopus subject areas

  • Accounting
  • Business, Management and Accounting(all)
  • Finance

Cite this

The sentiment premium and macroeconomic announcements. / Du, Ding; Hu, Ou.

In: Review of Quantitative Finance and Accounting, 23.03.2017, p. 1-31.

Research output: Contribution to journalArticle

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