Sentiment Risk Premia in the Cross-Section of Global Equity and Currency Returns

59 Pages Posted: 4 Jun 2018 Last revised: 30 Aug 2019

See all articles by Roland Füss

Roland Füss

University of St. Gallen - School of Finance

Massimo Guidolin

Bocconi University - Department of Finance

Christian Koeppel

University of St. Gallen

Multiple version iconThere are 2 versions of this paper

Date Written: August 28, 2019

Abstract

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

Füss, Roland and Guidolin, Massimo and Koeppel, Christian, Sentiment Risk Premia in the Cross-Section of Global Equity and Currency Returns (August 28, 2019). University of St.Gallen, School of Finance Research Paper No. 2018/17. Available at SSRN: https://ssrn.com/abstract=3186708 or http://dx.doi.org/10.2139/ssrn.3186708

Roland Füss

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland
+41 (0)71 224 70 42 (Phone)
+41 (0)71 224 70 88 (Fax)

HOME PAGE: http://www.sbf.unisg.ch/en/Lehrstuehle/Lehrstuhl_Fuess.aspx

Massimo Guidolin

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Christian Koeppel (Contact Author)

University of St. Gallen ( email )

Langgasse 1
St. Gallen, 9008
Switzerland

Register to save articles to
your library

Register

Paper statistics

Downloads
198
Abstract Views
816
rank
122,264
PlumX Metrics