Purpose: The purpose of this paper is to create a quantitative measure that captures the effects of investor sentiment in an objective way. Design/methodology/approach: The author introduced risk estimation bias (REB) to examine the effects of forecasting error of future market volatility on fund alpha. The author also used GARCH to model the volatility of the REB. Findings: The author documented a statistically significant relation between REB and realized market volatility. The author also found that the REB plays a significant role in explaining fund alpha. Originality/value: REB is the first quantitative measure to examine the effects of investor sentiment on risk estimation and fund performance. The GRACH properties of REB provide important information on how investor sentiment fluctuates over time.
All Science Journal Classification (ASJC) codes
- Strategy and Management