Investor sentiment, risk factors and stock return: evidence from Indian non‐financial companies

TLDR: This article employed the Fama and French time series regression approach to examine the impact of market risk premium, size, book-to-market equity, momentum and liquidity as risk factors on stock return.

Abstract: Purpose – The purpose of this paper is to evaluate the pricing implication of aggregate market wide investor sentiment risk for cross sectional return variation in the presence of other market wide risk factors.Design/methodology/approach – The paper employs the Fama and French time series regression approach to examine the impact of market risk premium, size, book‐to‐market equity, momentum and liquidity as risk factors on stock return. Given the importance of inherent imperfect rationality or sentiment risk, the paper further investigates the impact of investor sentiment on the cross section of stock return.Findings – The choice of a five factor model is apparently persuasive for consideration in investment decisions. Stocks are hard to value and difficult to arbitrage with characteristics which are significantly influenced with the sentiment risk. It is naive to argue for the universal pricing implication of sentiment risk in a multifactor model framework.Research limitations/implications – The test as...