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The effects of sentiment on market return and volatility and the cross-sectional risk premium of sentiment-affected volatility

Yang, Yan and Copeland, Laurence 2014. The effects of sentiment on market return and volatility and the cross-sectional risk premium of sentiment-affected volatility. [Working Paper]. Cardiff Economics Working Papers, Cardiff: Cardiff University.

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Abstract

We construct investor sentiment of UK stock market using the procedure of principal component analysis. Using sentiment-augmented EGARCH component model, we analyse the impacts of sentiment on market excess return, the permanent component of market volatility and the transitory component of market volatility. Bullish sentiment leads to higher market excess return while bearish sentiment leads to lower excess return. Sentiment-augmented EGARCH component model compares favourably to the original EGARCH component model which does not take investor sentiment into account. Furthermore, we test the cross-sectional risk premia of the permanent and transitory components of sentiment-affected volatility in the framework of ICAPM.

Item Type: Monograph (Working Paper)
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Subjects: H Social Sciences > HB Economic Theory
Publisher: Cardiff University
Date of First Compliant Deposit: 30 March 2016
Last Modified: 04 Jun 2017 08:26
URI: http://orca.cf.ac.uk/id/eprint/78014

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