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The Role of Investor Sentiment in Asset Pricing

HO, CHIEN-WEI (2012) The Role of Investor Sentiment in Asset Pricing. Doctoral thesis, Durham University.

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This thesis investigates various roles that investor sentiment may play in asset pricing. The empirical analysis consists of three main parts based on the role of investor sentiment in the stock markets. The first part discusses the role of investor sentiment as conditioning information. It aims to examine its ability to explain the dynamic nature of the expected returns for individual stocks and its explanatory power capture the financial market anomalies such as the size, value, liquidity, and effects. The second part focuses on the role of investor sentiment as a risk factor. The purpose is to construct a risk factor on the basis of investor sentiment and test whether this proposed sentiment factor is priced and helps to explain the aforementioned financial market anomalies. The third part explores the role of investor sentiment in different international stock markets. It attempts to assess the extent to which investor sentiment affects the stock market volatility and returns of different regions.
The results suggest that investor sentiment exhibits explanatory power for cross section of stock returns in the U.S. market. Acting as conditioning information or a risk factor, investor sentiment can generally capture the size and value effects. Furthermore, it can also capture the momentum effect under certain model specifications. The thesis shows that investors require compensation for bearing noise traders; in other words, investor sentiment is a priced factor. At the market level, the impacts of investor sentiment on stock volatility and returns vary across countries. For some countries investor sentiment affects both volatility and returns while for the others investor sentiment has less influence on stock price behaviour.
Overall, the findings of the thesis provide empirical evidence that overlooking the role of investor sentiment in classical finance theory could lead to an imperfect picture of describing the stock price behaviour.

Item Type:Thesis (Doctoral)
Award:Doctor of Philosophy
Keywords:Investor Sentiment; Conditional Asset Pricing Model; Time-Varying Model; Risk Factor; Volatility
Faculty and Department:Faculty of Social Sciences and Health > Economics, Finance and Business, School of
Thesis Date:2012
Copyright:Copyright of this thesis is held by the author
Deposited On:20 Feb 2012 09:50

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