Ambiguity, Risk, and Sentiment

The impact of sentiment on asset prices varies during periods of low and high ambiguity and risk and across countries. Examining stock market returns across twenty-nine countries, we show that the predictability of sentiment is more pronounced when ambiguity is low in Australia, Canada, Czech Republic, India, Ireland, Italy, Mexico, Netherlands, Poland, Portugal, Spain, the UK, and the US, while it is more pronounced when ambiguity is high in Austria, Belgium, Brazil, China, Denmark, Finland, France, Germany, Japan, Sweden, and Switzerland. Conversely, the effect of sentiment on returns is amplified when risk is high in Australia, Czech Republic, Ireland, Mexico, Netherlands, Poland, South Korea, Spain, Sweden, the UK, and the US, while it is amplified when risk is low in Austria, Brazil, China, Denmark, Finland, France, Germany, Italy, Japan, Russia, and Switzerland. We find similar patterns on how ambiguity and risk influence the relation between sentiment and asset pricing anomalies. Overall, the underlying mechanism driving the sentiment-return relation is different between ambiguity and risk and across countries