THE EFFECT OF INVESTOR SENTIMENT ON STOCK MARKET RETURNS

Abstract

In this Master Thesis, we study whether the effect of market sentiment on stocks that possess certain characteristics is still present. Additionally, we study whether the information is tradeable by defining three degrees of tradeability. We test whether portfolios that hold certain stocks are affected by changing market sentiment in general and in the cross-section. Our findings suggest that high investor sentiment is followed by low returns and vice versa. Importantly. the relation holds when using readily available data to construct the sentiment index. We conclude that investor sentiment has predictive power in the cross-section of returns.