Investor sentiment and economic forces

Junyan Shen, Jianfeng Yu, Shen Zhao

Research output: Contribution to journalArticlepeer-review

108 Scopus citations


Economic theory suggests that pervasive factors should be priced in the cross-section of stock returns. However, our evidence shows that portfolios with higher risk exposure do not earn higher returns. More importantly, our evidence shows a striking two-regime pattern for all 10 macro-related factors: high-risk portfolios earn significantly higher returns than low-risk portfolios following low-sentiment periods, whereas the exact opposite occurs following high-sentiment periods. These findings are consistent with a setting in which market-wide sentiment is combined with short-sale impediments and sentiment-driven investors undermine the traditional risk-return tradeoff, especially during high-sentiment periods.

Original languageEnglish (US)
Pages (from-to)1-21
Number of pages21
JournalJournal of Monetary Economics
StatePublished - Apr 1 2017
Externally publishedYes

Bibliographical note

Publisher Copyright:
© 2017 Elsevier B.V.


  • Beta
  • Factor
  • Investor sentiment
  • Macro risk
  • Market efficiency


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