Get 20M+ Full-Text Papers For Less Than $1.50/day. Start a 14-Day Trial for You or Your Team.

Learn More →

Investor sentiment, risk factors and stock return: evidence from Indian non‐financial companies

Investor sentiment, risk factors and stock return: evidence from Indian non‐financial companies Purpose – The purpose of this paper is to evaluate the pricing implication of aggregate market wide investor sentiment risk for cross sectional return variation in the presence of other market wide risk factors. Design/methodology/approach – The paper employs the Fama and French time series regression approach to examine the impact of market risk premium, size, book‐to‐market equity, momentum and liquidity as risk factors on stock return. Given the importance of inherent imperfect rationality or sentiment risk, the paper further investigates the impact of investor sentiment on the cross section of stock return. Findings – The choice of a five factor model is apparently persuasive for consideration in investment decisions. Stocks are hard to value and difficult to arbitrage with characteristics which are significantly influenced with the sentiment risk. It is naïve to argue for the universal pricing implication of sentiment risk in a multifactor model framework. Research limitations/implications – The test assets portfolios are not segregated as per any industry criteria. Practical implications – Investment managers can use a contrarian investment strategy, for the stocks that are hard to value and riskier to arbitrage to gain excess return when the market follows a downward trend. Originality/value – This makes the first attempt towards the investigation of the impact of the sentiment risk on cross sectional return variation from an emerging market perspective on such a diversified and large test asset portfolios. The paper has extended the available literature by investigating the impact of sentiment risk after controlling the liquidity risk factor in a multifactor specification. This measure of market wide irrational sentiment index is more comprehensive. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Indian Business Research Emerald Publishing

Investor sentiment, risk factors and stock return: evidence from Indian non‐financial companies

Loading next page...
 
/lp/emerald-publishing/investor-sentiment-risk-factors-and-stock-return-evidence-from-indian-lA8kvk8JdQ
Publisher
Emerald Publishing
Copyright
Copyright © 2012 Emerald Group Publishing Limited. All rights reserved.
ISSN
1755-4195
DOI
10.1108/17554191211252699
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this paper is to evaluate the pricing implication of aggregate market wide investor sentiment risk for cross sectional return variation in the presence of other market wide risk factors. Design/methodology/approach – The paper employs the Fama and French time series regression approach to examine the impact of market risk premium, size, book‐to‐market equity, momentum and liquidity as risk factors on stock return. Given the importance of inherent imperfect rationality or sentiment risk, the paper further investigates the impact of investor sentiment on the cross section of stock return. Findings – The choice of a five factor model is apparently persuasive for consideration in investment decisions. Stocks are hard to value and difficult to arbitrage with characteristics which are significantly influenced with the sentiment risk. It is naïve to argue for the universal pricing implication of sentiment risk in a multifactor model framework. Research limitations/implications – The test assets portfolios are not segregated as per any industry criteria. Practical implications – Investment managers can use a contrarian investment strategy, for the stocks that are hard to value and riskier to arbitrage to gain excess return when the market follows a downward trend. Originality/value – This makes the first attempt towards the investigation of the impact of the sentiment risk on cross sectional return variation from an emerging market perspective on such a diversified and large test asset portfolios. The paper has extended the available literature by investigating the impact of sentiment risk after controlling the liquidity risk factor in a multifactor specification. This measure of market wide irrational sentiment index is more comprehensive.

Journal

Journal of Indian Business ResearchEmerald Publishing

Published: Aug 17, 2012

Keywords: Sentiment risk; Five factor model; Liquidity risk; Risk management; Momentum strategy; Stock returns; India

References