Corporate bond prices and idiosyncratic risk: evidence from Australia

In this paper we investigate the bond price effect upon the information arrival of firm-specific idiosyncratic risk. We consider idiosyncratic dispersion and idiosyncratic volatility that capture, respectively, the direction of information and the magnitude of idiosyncratic risk. We find that idiosyncratic volatility does not affect bond prices, while the direction of idiosyncratic risk which reflects the favorable or unfavorable information exhibits impacts on bond prices. Idiosyncratic dispersion in the stock return of a firm in the preceding week, in general, is positively associated with bond price changes in the current week. This effect is most pronounced for firms exhibiting characteristics associated with lower default risk

Predicting stock market returns and volatility with investor sentiment: Evidence from eight developed countries

We test the predictive ability of investor sentiment on the return and volatility at the aggregate market level in the U.S., four largest European countries and three Asia-Pacific countries. We find that in the U.S., France and Italy periods of high consumer confidence levels are followed by low market returns. In Japan both the level and the change in consumer confidence boost the market return in the next month. Further, shifts in sentiment significantly move conditional volatility in most of the countries, and in Italy such impacts lead to an increase in returns by 4.7% in the next month

Sentiment sensitivity, limits of arbitrage, and pricing anomalies

We investigate whether an investor sentiment factor explains the cross-section of stock returns. The average return differential is 1.48% (0.75%) per month between the decile portfolios with the highest positive sentiment beta and that with negative sentiment beta. The sentiment factor, LMS, has statistically significant average returns of 1.71% per month, and shows a positive and statistically significant market price. The sentiment-augmented asset-pricing models explain the size effect, and conditional models often capture the size, value and momentum effects

Investor sentiment risk factor and asset pricing anomalies

We investigate the role of investor sentiment as a risk factor in stock returns. The average return differential is 1.48% (0.75%) per month between the decile portfolis with the highest positive (most negative) sentiment beta and that with zero sentiment beta. The sentiment factor, SMN, has statistically significant average returns ranging from 1.36% to 0.67% per month, and commands a positive and statistically significant risk premium. Consistent with the theory that sentiment creates a risk in addition to fundamental risk, the sentiment-augmented asset-pricing models always explain the size effect, and conditional models often capture the size, value and momentum effects

Sentiment sensitivity, limits of arbitrage, and pricing anomalies

We investigate whether an investor sentiment factor explains the cross-section of stock returns. \ud \ud The average return differential is 1.48% (0.75%) per month between the decile portfolios with the highest positive sentiment beta and that with negative sentiment beta. The sentiment factor, LMS, has statistically significant average returns of 1.71% per month, and shows a positive and statistically significant market price. The sentiment-augmented asset-pricing models explain the size effect, and conditional models often capture the size, value and momentum effects

The Fed and the Stock Market: A Tale of Sentiment States

We analyze the period before the zero lower bound and show that the state of investor sentiment strongly affects the transmission of monetary policy to the stock market. The impact of Federal funds rate (FFR) surprises is mostly potent when sentiment-driven overvaluation is followed by a correction, whereby the stock market increases by 0.8% in response to an unexpected FFR cut of 10 basis points. Our findings suggest that monetary easing surprises during sentiment-waning phases boost the stock market by alleviating investors’ fear. The ability of sentiment to drive the observed state dependence is hard to reconcile with rational pricing