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The systematic pricing of market sentiment shock
Authors:Samuel Xin Liang
Institution:1. Tyndale Seminary, Tyndale University College and Seminary, Toronto, Ontario, Canadaxin.liang@mytyndale.ca samuelxliang@gmail.com
Abstract:ABSTRACT

We show that market sentiment shocks create demand shocks for risky assets and a systematic risk for assets. We measure a market sentiment shock as the unexpected portion of the University of Michigan Consumer Sentiment Index’s growth. This shock prices stock returns in arbitrage pricing theory framework at 1% after controlling for market, size, value, momentum, and liquidity risk factors. Its premium lowered the implied risk aversion by 97.9% to 11.46 between 1978 and 2009 in our sentiment consumption-based capital-asset-pricing model. Merton’s 1973. “An Intertemporal Capital Asset Pricing Model.” Econometrica 41: 867–887]. intertemporal capital-asset-pricing model reconfirms our finding that this market sentiment shock is a systematic risk factor that provides investment opportunities.
Keywords:Market sentiment  market sentiment shock  demand shock  consumer sentiment  investor sentiment  sentiment risk factor
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