Do sentiment and behavioral heterogeneity among investors impact asset prices in financial markets

Abstract

This work project adds to behavioral finance literature by examining the effect of behavioral investor sentiment and its degree of heterogeneity on asset prices. With several regression models it is differentiated between daily and monthly variables, as well as different sectors. The analysis underlines the relevance of incorporating investor sentiment into behavioral asset pricing models as it explains up to 20% of variation in market excess returns. The work project concludes that heterogeneity in investor sentiment has a negative effect on asset prices. Furthermore, investor sentiment has a bigger effect on the financial sector than on other analyzed sectors.