Sentiment Risk Premia in the Cross-Section of Global Equity and Currency Returns
59 Pages Posted: 4 Jun 2018 Last revised: 30 Aug 2019
Date Written: August 28, 2019
This paper introduces a new sentiment-augmented asset pricing model in order to provide a comprehensive understanding of the role of non-fundamental risk factors. We ﬁnd that news and social media search-based indicators that measure the aggregate investor sentiment are signiﬁcantly related to excess returns across diﬀerent asset classes and markets. Adding sentiment factors to both classical and more recent state-of-the-art pricing models leads to a signiﬁcant increase in model performance. Following a two-stage Fama-MacBeth procedure, our modiﬁed pricing model obtains positive estimates of the risk premium for negative sentiment for global equity markets. We interpret them as measures of additional market uncertainty not captured by standard risk factors. Negative sentiment captures investors’ fear, for which they demand an additional risk premium on sentiment-sensitive assets. Consequently, our empirical results contribute to the explanation of the cross-section of average, international excess equity and foreign exchange returns.
Keywords: asset pricing; behavioral finance; financial markets; investor sentiment; sentiment risk premium
JEL Classification: C53, G12, G41
Suggested Citation: Suggested Citation