Investor Sentiment in the Stock Market

By Malcolm P. Baker, Jeffrey Wurgler. 2007

160 citations recorded by the source corpus.

Real investors and markets are too complicated to be neatly summarized by a few selected biases and trading frictions. The "top down" approach to behavioral finance focuses on the measurement of reduced form, aggregate sentiment and traces its effects to stock returns. It builds on the two broader and more irrefutable assumptions of behavioral finance -- sentiment and the limits to arbitrage -- to explain which stocks are likely to be most affected by sentiment. In particular, stocks of low capitalization, younger, unprofitable, high volatility, non-dividend paying, growth companies, or stocks of firms in financial distress, are likely to be disproportionately sensitive to broad waves of investor sentiment. We review the theoretical and empirical evidence for these predictions.

Subfields: Accounting, Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/c84879718b0c636d9804fcabe4688e722421b071

Citations in the corpus

• A New Anomaly: The Cross-Sectional Profitability of Technical Analysis (2013, unknown): “Baker and Wurgler (2006, 2007) provide evidence that investor sentiment is related to expected returns and risks of the market.”
• The Business Cycle, Investor Sentiment, and Costly External Finance (2012, unknown): “As we mention in the introduction, Baker and Wurgler (2006, 2007) and Baker (2009) argue that sentiment should have a greater effect on more speculative securities that are difficult to value.”
• Measuring Investor Sentiment with Mutual Fund Flows (2012, unknown): “25 This is consistent with Baker and Wurgler (2007), who find this relation, but state that the statistical significance is modest and do not report it.”
• Quantifying Sentiment with News Media across Local Housing Markets (2018, unknown): “…multifactor index created with a set of 2 Downloaded from https://academic.oup.com/rfs/advance-article-abstract/doi/10.1093/rfs/hhy036/4970499 by University of Chicago user on 14 April 2018 proxies following the methodology of Baker and Wurgler (2007) and find that these also correlate highly.”
• Style investing, comovement and return predictability. (2013, unknown): “In their words: 3 Baker and Wurgler (2007) point out the difficulties in measuring aggregate sentiment despite attempts by many authors using trades and flows (see, for example, Kumar and Lee, 2006; Frazzini and Lamont, S. Wahal, M.D. Yavuz / Journal of Financial Economics 107 (2013) 136–154…”
• A Comprehensive Look at Financial Volatility Prediction by Economic Variables (2011, unknown): “We also include lagged equity market returns (MKT) to capture the well-established leverage effect (Black, 1976; Glosten, Jagannathan, and Runkle, 1993; Nelson, 1991), i.e. the finding that negative returns are associated with higher subsequent volatility. Other equity variables include the risk fac”
• Investor Sentiment, Limits to Arbitrage and Private Market Returns (2014, unknown): “C© 2013 American Real Estate and Urban Economics Association fundamentals encompasses the influences of investor sentiment on asset valuation (e.g., Baker and Wurgler 2006, 2007).2 Sentiment-induced asset mispricing arises from a combination of sentiment-driven investor demand and limits to…”
• Investor Sentiment and the Mean-Variance Relation (2011, unknown): “Baker and Wurgler (2007) build a monthly sentiment index with the similar methodology as their annual index.”
• Does investor sentiment predict the asset volatility? Evidence from emerging stock market India (2015, unknown): “The recent empirical evidence shows that investor sentiment influences the expected stock returns and mean–variance relation of stock returns (e.g. Baker and Wurgler, 2006, 2007, Yu and Yuan, 2011).”
• An empirical examination of investor sentiment and stock market volatility: evidence from India (2020, unknown): “Investors’ sentiment and stock market volatility Following the theoretical and empirical models proposed by Baker and Wurgler (2007), Brown and Cliff (2004) and Baker et al. (2012), this study used market-related indicators for the construction of the investor sentiment index in the initial stage.”
• A Financing-Based Misvaluation Factor and the Cross Section of Expected Returns (2010, unknown): “…firms that engage in IPOs and SEOs on average 8See Lee, Shleifer, and Thaler (1991), Barberis, Shleifer, and Wurgler (2005), Goetzmann and Massa (2005), Baker and Wurgler (2006, 2007), Brown, Goetzmann, Hiraki, Shiraishi, and Watanabe (2008), Boyer (2008), and Barber, Odean, and Zhu (2009).”