Do Investors Care About Noise Trader Risk?

International audienceThe link between investor sentiment and asset valuation is at the center of a long-running debate in behavioral finance. Using a new composite sentiment indicator, we show that the conventional risk does not explain the abnormal returns of portfolios most sensitive to the sentiment factor. Our result supports the existence of a sentiment risk valued by financial markets. We also find that the firms more impacted by the sentiment risk correspond to difficult-to-arbitrage and hard-to-value stocks, e.g. small stocks, growth stocks, young stocks, unprofitable stocks, lower dividend-paying stocks, intangible stocks and high volatility stocks