Celebrating Success: Professor Darren Duxbury

Congratulations to Professor Darren Duxbury, whose paper “Investor Sentiment and the Risk-Return Relation: A Two-in-One Approach”, co-authored by Wenzhao Wang (ex NCL PhD, now at Edinburgh Napier), has been accepted by European Financial Management.

In the paper we examine the influence of retail and institutional investor sentiment, both separately and jointly, on the risk-return relationship. Investor sentiment has been shown to distort the risk-return relationship, with a potentially destabilizing impact on financial markets. To this end, we adopt two weekly sentiment proxies, American Association of Individual Investors (AAII) and Investors Intelligence (II), for retail and institutional investor sentiment, respectively.  In market- and firm-level tests we find evidence of the destabilizing impact of sentiment on the risk-return relation is due to retail and institutional investor sentiments jointly. Hence, we conclude that institutional investors do not serve to counter retail investor sentiment and indeed contribute jointly to the destabilizing impact of sentiment on the risk-return relationship.

Title

Investor Sentiment and the Risk-Return Relation: A Two-in-One Approach

Abstract

Traditional finance theory posits a positive risk-return relation, but empirical evidence is inconclusive. Retail investor sentiment has long been viewed as a distorting factor, while more recently institutional investor sentiment is thought to play a role. We examine the separate and joint impacts of retail and institutional investor sentiments on the risk-return relation. We find, at both market and firm levels, the risk-return relation is more likely to be distorted by the two investor-type sentiments jointly, rather than separately. We further find a cross-sectional pattern, with the risk-return relation being more sensitive to investor sentiment for stocks with specific characteristics.