Investor Sentiment and the Risk‐Return Relation: A Two‐in‐One Approach

Duxbury, Darren; Wang, Wenzhao

Abstract

Traditional finance theory posits a positive risk–return relation, but empirical evidence is inconclusive. Retail investor sentiment has long been viewed as a distorting factor, while more recently institutional investor sentiment is thought to play a role. We examine the separate and joint impacts of retail and institutional investor sentiments on the risk-return relation. We find, at both market and firm levels, the risk-return relation is more likely to be distorted by the two investor-type sentiments jointly, rather than separately. We further find a cross-sectional pattern, with the risk-return relation being more sensitive to investor sentiment for stocks with specific characteristics.

Citation

Duxbury, D., & Wang, W. (2024). Investor Sentiment and the Risk‐Return Relation: A Two‐in‐One Approach. European Financial Management, 30(1), Article 496-543. https://doi.org/10.1111/eufm.12427

• Journal Article Type: Article
• Acceptance Date: Apr 21, 2023
• Online Publication Date: May 13, 2023
• Publication Date: 2024-01
• Deposit Date: May 15, 2023
• Publicly Available Date: May 15, 2023
• Print ISSN: 1354-7798
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 30
• Issue: 1
• Article Number: 496-543
• DOI: https://doi.org/10.1111/eufm.12427
• Keywords: beta-return relation, institutional investor sentiment, mean–variance relation, retail investor sentiment, risk-return relation
• Public URL: http://researchrepository.napier.ac.uk/Output/3089601