EcoFin Research Papers

This paper investigates whether the pricing of investor sentiment varies systematically across market regimes. Using monthly equity market data for 35 countries from 1995 to 2024, we identify bull, bear, and crisis states through a Markov-switching volatility framework. Investor sentiment is measured using a composite index combining news-based sentiment and search-engine attention indicators. We estimate regime-specific asset pricing models in which sentiment enters both as a direct pricing factor and through interaction terms with regime indicators. The empirical results reveal strong state dependence: sentiment risk is not priced during tranquil bull markets but becomes significantly priced during bear and crisis regimes, when limits to arbitrage intensify. Assets with high sentiment exposure earn higher expected returns exclusively in downturns, consistent with compensation for crash-state risk. These findings reconcile mixed evidence in the sentiment literature and demonstrate that sentiment premia emerge primarily as conditional rather than unconditional phenomena

Investor sentiment, regime dependence, asset pricing, market cycles, crisis dynamics

G12, C22, E32

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