Abstract
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 language | English (US) |
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Pages (from-to) | 1-21 |
Number of pages | 21 |
Journal | Journal of Monetary Economics |
Volume | 86 |
DOIs | |
State | Published - Apr 1 2017 |
Externally published | Yes |
Bibliographical note
Publisher Copyright:© 2017 Elsevier B.V.
Keywords
- Beta
- Factor
- Investor sentiment
- Macro risk
- Market efficiency