Anxiety, Excitement, and Asset Prices

This study examines the impact of integral emotions on portfolio decisions and asset prices. Using a new dictionary of anxiety- and excitement-related keywords, we measure the emotional state of the market and compute firm-level sensitivity to changes in market-level emotions (i.e., emotion beta). We find that stocks with high emotion betas outperform low emotion beta firms and this performance differential is corrected in about four months. During the 1990-2018 sample period, a Long-Short investment strategy with high-emotion beta stocks in the Long portfolio and low-emotion beta stocks in the Short generates an alpha of 4.92%. This evidence of emotion-based predictability is distinct from the known pricing effects of mood, sentiment, economic and policy uncertainty, and tone. Collectively, our findings show that emotional connections between investors and firms are priced.