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Bridge over ocean
23 June 2025 Financial Analysts Journal Volume 81, Issue 3

Investor Emotions and Asset Prices

Shehub Bin Hasan, Alok Kumar, and Richard J Taffler

This study introduces an emotion-based market sentiment measure, showing that stocks with high emotion sensitivity outperform others, generating a 6–9% annualized alpha. The effect persists for up to six months, revealing exploitable mispricing.

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Abstract

We develop a new emotion-based market-level sentiment indicator to measure the emotional state of the market. Using this aggregate series, we compute firm-level sensitivity to shifts in market-level emotions and find that stocks with high-emotion betas outperform low-emotion- beta firms. This performance differential is corrected in about six months. A trading strategy that takes a long (short) position in high- (low-) emotion beta stocks generates an annualized alpha of more than 6%. This evidence of emotion-based predictability is distinct from the known pricing effects of mood, traditional sentiment measures, economic and policy uncertainty, and tone.