Is investor sentiment a relevant factor in determining asset prices?

Published in: Investment Analysts Journal
Volume 47, issue 3, 2018 , pages: 243–257
DOI: 10.1080/10293523.2018.1497250
Author(s): Kamini SolankiSchool of Economic and Business Science, South Africa, Yudhvir SeetharamSchool of Economic and Business Science, South Africa


The APT framework allows for a multitude of risk factors to be priced into asset returns, implying that it can be used to model returns using either macroeconomic or microeconomic factors. As such, the APT allows for non-traditional factors, such as investor sentiment, to be included. A macroeconomic APT framework was developed for nine countries using the variables outlined by Chen, Roll, and Ross (1986) and investor sentiment was measured by the FEARS index (Da, Engelberg, & Gao, 2015). Regression testing was used to determine whether FEARS is a statistically significant explanatory variable in the APT model for each country. The results show that investor sentiment is a statistically significant explanatory variable for market returns in five out of the nine countries examined. These results add to the existing APT literature as they show that investor sentiment has a significant explanatory role in explaining asset prices and their associated returns.

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