Investor Sentiment and the Risk–Return Tradeoff in the Brazilian Market

This study examines the influence of investor sentiment on the risk–return relationship in the Brazilian stock market from 2002 to 2015. Using the Consumer Confidence Index as a substitute for the level of investor sentiment, we find that the relationship between conditional variance and stocks return is positive (negative) in periods of low (high) sentiment, except for small stocks, which always show a negative relationship between the constructs. The deterioration of the positive relationship between risk and return when sentiment is high is a result of the sharp growth in the number of less sophisticated investors under these circumstances.