Investor sentiment and the mean-variance relation

Jianfeng Yu, Yu Yuan

Research output: Contribution to journalArticlepeer-review

225 Scopus citations


This study shows the influence of investor sentiment on the market's mean-variance tradeoff. We find that the stock market's expected excess return is positively related to the market's conditional variance in low-sentiment periods but unrelated to variance in high-sentiment periods. These findings are consistent with sentiment traders who, during the high-sentiment periods, undermine an otherwise positive mean-variance tradeoff. We also find that the negative correlation between returns and contemporaneous volatility innovations is much stronger in the low-sentiment periods. The latter result is consistent with the stronger positive ex ante relation during such periods.

Original languageEnglish (US)
Pages (from-to)367-381
Number of pages15
JournalJournal of Financial Economics
Issue number2
StatePublished - May 2011


  • Investor sentiment
  • Mean-variance relation
  • Risk-return tradeoff
  • Volatility

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