Investor Sentiment, Left tail Risk & Cross-sectional Stock Return

Subject Areas : Financial Knowledge of Securities Analysis

Maryam Davalo ^{1 *} , Raha Behmanesh ²

1 - Associate Prof., Faculty of Management and Accounting, Shahid Beheshti University, Tehran, Iran. (Corresponding Author)
2 - MSc. Student in Financial Management, Faculty of Management and Accounting, Shahid Beheshti University, Tehran, Iran

Received: 2023-08-12 Accepted : 2023-10-23 Published : 2025-01-25

Keywords: Left tail risk, Value at Risk, Investor Sentiment,

Abstract :

Objective: An investigation of investor sentiment on relation between cross-sectional expected stock return and left tail risk. Method: For this aim, a sample of 201 listed firms in Tehran Stock Exchange from 2009 to 2019 is examined. “Portfolio analysis” and “Fama-Mcbeth regression” (1973) approaches are used to test this hypothesis “investor sentiment affects the relation between expected stock return and left tail risk”. Findings: Reverse relation between VaR and expected stock return is confirmed for high sentiment period but isn’t for low sentiment period. The volatility effect overcomes the VaR explanation power to elucidate cross-sectional stock return variations for High sentiment. Increased sentiment of noisy investors strengthens their optimism and subsequently increases stock price. This point results in limit to arbitrage therefore the effect of noisy investors can not be cancle out. By increasing the level of investor sentiment, stock retrun is overestimated and its risk is underestimated. Demand for stock having high volatility increases its price and consequently the future stock return decreases. Conclusion: The relation between expected stock return and VaR affected by investor sentiment.