Sentiment approach to negative expected return in the stock market

a r t i c l e i n f o A large number of researches have shown that the negative return of risky asset exists and has the profound significance whether for actual investment or theory studies. This paper investigates the effect of sentiment by establishing the sentiment asset pricing model, and explores the negative expected return when the parameters change in different situations. We provide the necessary and sufficient conditions for the negative expected return. The annual rate of return is assumed to be positive in the traditional financial theory, but the negative return of risky asset does exist in the reality financial market, and it has profound significance whether for actual investments or theory researches. For example, Ang et al. (2006, 2009) found a idiosyncratic volatility puzzle, and constructed a zero-investment portfolio that is long the most volatile portfolio and short the least volatile portfolio yields about − 1% the following month. Bali et al. (2011) found a negative and significant relation between the maximum daily return over the past one month and expected stock returns, i.e., the expected return of stock is negative when the current biggest daily return of stock is higher. Eleswarapu and Thompson (2007) indicated that an unsustainably high price will cause price bubble, and the expected return premium is negative, which is different from the implicit assumption that the expected return premium is positive in traditional asset equilibrium price model (see, The different fluctuations of stock prices are caused by the investor cognitive biases and psychological factor of asset demand, but not fundamentals in the short term, so behavioral asset pricing model considering investor biases of psychology and behavior can better depict the fluctuations of asset prices compared to traditional asset pricing model based on rational expectations, even can more reasonably depict the characteristic of negative expected return. In the study of considering investor psychological factors, the asset pricing models based on the noise and biases are the most important and the most fruitful achievements. For example, the most famous study on the asset pricing model based on noise traders is DSSW model of De Long et al. (1990), which distinguished investors between sophisticated investors and noise traders, and explored the asset equilibrium price. And the asset pricing models based on biases mainly have the BSV model of Barberis et al. However, compared to the latest researches based on investor sentiment in …