Sentiment Issues in Stock Prices and Mutual Funds

Abstract

Baker and Wurgler [2007] take a “top down” approach to behavioral finance and the stock market. Investor sentiment is taken to be exogenous, and the focus is on its empirical effects. Sentiment is measurable and its waves have clearly discernible, important, and regular effects on individual firms and the stock market as a whole. Stocks that are hardest to arbitrage or value are the ones most affected by sentiment. Other studies discussed in the article relate to aspects of investor sentiment and sentiment indexes, seeking to help with forecasting stock returns and trade volume and providing a rigorous analysis of the predictive power of investor sentiment.