Abstract
In Cochrane’s (1991) investment-based asset pricing model, aggregate investment is driven by conditional equity premium; Arif and Lee (2014), however, find that it is primarily influenced by investor sentiment or gauges of irrational exuberance. We reconcile these conflicting views by showing that the positive relation between aggregate investment and investor sentiment documented by Arif and Lee (2014) reflects the fact that both variables move closely with conditional equity premium. Our results cast doubt to (1) the conjecture that stock market mispricing is an important driver of aggregate investment and (2) the conventional wisdom that investor sentiment measures irrationality.
Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
