Stock market volatility, excess returns, and the role of investor sentiment

Wayne Y. Lee, Christine X. Jiang, Daniel C. Indro

Research output: Contribution to journalArticlepeer-review

293 Scopus citations

Abstract

Using the Investors' Intelligence sentiment index, we employ a generalized autoregressive conditional heteroscedasticity-in-mean specification to test the impact of noise trader risk on both the formation of conditional volatility and expected return as suggested by De Long et al. [Journal of Political Economy 98 (1990) 703]. Our empirical results show that sentiment is a systematic risk that is priced. Excess returns are contemporaneously positively correlated with shifts in sentiment. Moreover, the magnitude of bullish (bearish) changes in sentiment leads to downward (upward) revisions in volatility and higher (lower) future excess returns.

Original languageEnglish (US)
Pages (from-to)2277-2299
Number of pages23
JournalJournal of Banking and Finance
Volume26
Issue number12
DOIs
StatePublished - Dec 1 2002

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

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