Investor sentiment and aggregate volatility pricing

Chiraz Labidi, Soumaya Yaakoubi

    Research output: Contribution to journalArticlepeer-review

    13 Citations (Scopus)

    Abstract

    This paper aims at providing new insights on the pricing of aggregate volatility risk by incorporating investor sentiment in the relation between sensitivity to innovations in implied market volatility and expected stock returns. Using both cross-sectional and time series analysis, we investigate the effect of the exposure to aggregate volatility risk on stock returns in both high-sentiment and low-sentiment regimes. We find that exposure to aggregate volatility risk is negatively related to returns when sentiment is low. However, this relation loses its significance when sentiment is high. The documented negative relation is robust to controls for other variables and to the use of various sentiment proxies, suggesting that aggregate volatility risk is an independent risk factor only during low sentiment periods.

    Original languageEnglish
    Pages (from-to)53-63
    Number of pages11
    JournalQuarterly Review of Economics and Finance
    Volume61
    DOIs
    Publication statusPublished - Aug 1 2016

    Keywords

    • Aggregate volatility
    • Asset pricing
    • Implied market volatility
    • Investor sentiment
    • VIX

    ASJC Scopus subject areas

    • Finance
    • Economics and Econometrics

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