Sentiment Risk Premia in the Cross-Section of Global Equity and Currency Returns
64 Pages Posted: 24 Sep 2019
Date Written: September 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 are significantly related to excess returns across diﬀerent asset classes and markets. 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 negative sentiment for global equity markets. Our results contribute to the explanation of the cross-section of average, international excess equity and foreign exchange returns.
Keywords: sentiment; Cross-section of international equity indices; Currency returns; Fama-MacBeth risk premia estimation
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