Journal
JOURNAL OF FINANCIAL ECONOMICS
Volume 100, Issue 2, Pages 367-381Publisher
ELSEVIER SCIENCE SA
DOI: 10.1016/j.jfineco.2010.10.011
Keywords
Investor sentiment; Mean-variance relation; Risk-return tradeoff; Volatility
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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. (C) 2010 Elsevier B.V. All rights reserved.
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