Effect of Investor Sentiment on Cross Sectional Stock Returns - Case Study Example

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Effect of Investor Sentiment on Cross Sectional Stock Returns

Competition among them leads to a balance in which prices equal the reasonably inexpensive value of expected cash flows, and in which the cross-section of predictable returns depends only on the cross-section of systematic risks. Even if some investors are irrational, classical theory argues, their strain are offset by arbitrageurs with no momentous impact on prices. In this paper, we present evidence that investor sentiment may have major effects on the cross-section of stock prices.
Investment sentiments with in the stock market and the effect of investor emotions on stock returns are certainly the first issue that investors should consider. At the outset, investing is an act of faith, a willingness to postpone present consumption and save for the future. Investing for the long term is central to the achievement of optimal returns by investors. ...Show more

Summary

We learn how investor sentiment affects the cross-section of stock returns. We have forecasted that a wave of investor sentiment excessively affects securities whose valuation are highly prejudiced and are tricky to arbitrage. We find that when start of period proxy for investor sentiment are low, succeeding returns are comparatively high on small stocks, young stocks, high volatility stocks, unprofitable stocks, non dividend-paying stocks, extreme-growth stocks, and concerned stocks, suggestive of that such stocks are relatively under priced in low-sentiment states…
Author : gbashirian
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