Skip to Main Content
HBS Home
  • About
  • Academic Programs
  • Alumni
  • Faculty & Research
  • Baker Library
  • Giving
  • Harvard Business Review
  • Initiatives
  • News
  • Recruit
  • Map / Directions
Faculty & Research
  • Faculty
  • Research
  • Featured Topics
  • Academic Units
  • …→
  • Harvard Business School→
  • Faculty & Research→
Publications
Publications
  • Article
  • Journal of Economic Perspectives

Investor Sentiment in the Stock Market

By: Malcolm Baker and Jeffrey Wurgler
  • Format:Print
  • | Pages:23
ShareBar

Abstract

We examine how investor sentiment affects the cross-section of stock returns. Theory predicts that a broad wave of sentiment will disproportionately affect stocks whose valuations are highly subjective and are difficult to arbitrage. We test this prediction by studying how the cross-section of subsequent stock returns varies with proxies for beginning-of-period investor sentiment. When sentiment is low, subsequent returns are relatively high on smaller stocks, high volatility stocks, unprofitable stocks, non-dividend-paying stocks, extreme-growth stocks, and distressed stocks, consistent with an initial underpricing of these stocks. When sentiment is high, on the other hand, these patterns attenuate or fully reverse. The results are consistent with predictions and appear unlikely to reflect an alternative explanation based on compensation for systematic risk.

Keywords

Financial Markets; Stocks; Investment Return; Valuation; Forecasting and Prediction; Volatility; Price; Risk and Uncertainty; Behavioral Finance

Citation

Baker, Malcolm, and Jeffrey Wurgler. "Investor Sentiment in the Stock Market." Journal of Economic Perspectives 21, no. 2 (Spring 2007): 129–151.
  • Find it at Harvard
  • Read Now

About The Author

Malcolm P. Baker

Finance
→More Publications

More from the Authors

    • 2022
    • Annual Review of Financial Economics

    The Pricing and Ownership of U.S. Green Bonds

    By: Malcolm Baker, Daniel Bergstresser, George Serafeim and Jeffrey Wurgler
    • November 2022 (Revised January 2023)
    • Faculty Research

    Dicerna

    By: Malcolm Baker, Ishita Sen and Jonathan Wallen
    • 2022
    • Faculty Research

    How Do Investors Value ESG?

    By: Malcolm Baker, Mark Egan and Suproteem K. Sarkar
More from the Authors
  • The Pricing and Ownership of U.S. Green Bonds By: Malcolm Baker, Daniel Bergstresser, George Serafeim and Jeffrey Wurgler
  • Dicerna By: Malcolm Baker, Ishita Sen and Jonathan Wallen
  • How Do Investors Value ESG? By: Malcolm Baker, Mark Egan and Suproteem K. Sarkar
ǁ
Campus Map
Harvard Business School
Soldiers Field
Boston, MA 02163
→Map & Directions
→More Contact Information
  • Make a Gift
  • Site Map
  • Jobs
  • Harvard University
  • Trademarks
  • Policies
  • Accessibility
  • Digital Accessibility
Copyright © President & Fellows of Harvard College