Abstract
We study how market sentiment is dynamically related to a range of risk premia in the short-run, using three measures of sentiment (the implied volatility index, investment advisor sentiment, and individual investor sentiment) and four factor premia (market, size, value, and momentum) for the U.S. market. Based on the generalized impulse-response analysis in a VAR framework, we find that the sentiment measures have weak impacts on risk premia. However, we observe strong feedback effects where these sentiments are led by risk premia. That is, a higher market or size premium makes market participants bullish, while a higher value or momentum premium induces fear among market participants. We also find that three sentiment measures are closely related in the short run; in particular, the advisor sentiment has strong dynamic impacts on the implied volatility and individual investor sentiment.
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