The impact of individual and institutional investor sentiment on the market price of risk |
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Authors: | Rahul Verma Gke Soydemir |
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Institution: | aCollege of Business, University of Houston-Downtown, 320 North Main Street, Houston, TX 77002, United States;bCollege of Business Administration, University of Texas-Pan American, Edinburg, 1201 West University Drive, 78539, United States |
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Abstract: | We examine the effect of individual and institutional investor sentiment on the market price of risk derived from DJIA and S&P500 index returns. Consistent with behavioral asset pricing models, we find significant positive response of rational sentiment suggesting greater incentive for rational investors to engage in arbitrage when the compensation for taking risk is greater. Further, an increase in irrational optimism leads to a significant downward movement, but an increase in rational sentiment does not lead to a significant change market price of risk. These results are robust for both market indexes, DJIA and S&P500 and for both individual and institutional investor sentiment. |
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Keywords: | Stock returns Investor sentiment VAR model |
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