Sentiment Risk Premia in the Cross-Section of Global Equity
64 Pages Posted: 4 Jun 2018 Last revised: 21 Jan 2020
Date Written: December 20, 2019
This paper introduces a new sentiment-augmented asset pricing model in order to pro- vide a comprehensive understanding of the role of this new type of risk factors. We ﬁnd that news and social media search-based indicators are signiﬁcantly related to international stocks’ excess returns. Adding sentiment factors to both, classical and more recent pricing models, leads to a signiﬁcant increase in model performance. Following the Fama-MacBeth procedure, our modiﬁed pricing model obtains positive estimates of the risk premium for positive sentiment, while being negative for negative sentiment. Our results contribute to the explanation of the cross-section of average, international excess returns and are robust for fundamental asset pricing factors, idiosyncratic volatility, skewness, and kurtosis.
Keywords: asset pricing; behavioral finance; financial markets; investor sentiment; sentiment risk premium
JEL Classification: C53, G12, G41
Suggested Citation: Suggested Citation