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We explore the time-series relationship between investor sentiment and the small-stock premium using consumer confidence as a measure of investor optimism. We estimate the components of consumer confidence related to economic fundamentals and investor sentiment. After controlling for the time variation of beta, we study the time-series variation of the pricing error with sentiment. Over the last 25 years, investor sentiment measured using consumer confidence forecasts the returns of smalldoi:10.1093/rfs/hhj038 fatcat:p4zvisooefajpdd6voi3rvom4i