Behavioral Beta and Asset Valuation Models

The investigation of investor sentiment and its relation to stock returns, volatility and asset valuation is the subject of considerable debate in many empirical researches. Using indirect sentiment measures, we provide evidence that sentiment levels and changes have important predictive power for stock returns. In addition, we find that most of our sentiment measures cause volatility rather than vice versa. Finally, our evidence supports strongly the evidence that sentiment affects asset valuation. Market pricing errors implied by fundamental valuation models are strongly related to sentiment. These results are robust to the inclusion of investor sentiment as an explanatory variable in these pricing models and prove the improvement of the shares evaluation quality.