Investor Sentiment and the Pricing of Characteristics-Based Factors

65 Pages Posted: 25 Feb 2020 Last revised: 27 Feb 2020

See all articles by Zhuo Chen

Zhuo Chen

Tsinghua University; Tsinghua University - PBC School of Finance

Bibo Liu

Tsinghua University - PBC School of Finance

Huijun Wang

University of Melbourne

Zhengwei Wang

Tsinghua University - PBC School of Finance

Jianfeng Yu

Tsinghua University - PBC School of Finance

Date Written: February 7, 2020

Abstract

Using portfolios that are formed by directly sorting stocks based on their exposure to characteristics-based factors, earlier studies find that these beta-sorted portfolios have very large ex post factor beta spreads. However, the return spreads between high- and low-beta firms are typically tiny and insignificant. This study examines the time variation in the pricing of a large set of characteristics-based factors. Our evidence shows a striking two-regime pattern for most of the factor-beta-sorted portfolios: high-beta portfolios earn significantly higher returns than low-beta portfolios following high-sentiment periods, whereas the exact opposite occurs following low-sentiment periods. Remarkably, this two-regime pattern is completely reversed when macro-related factors, such as consumption growth and TFP growth, are used. The evidence based on mutual fund and hedge fund returns also confirms this two-regime pattern. Our findings suggest that the exposure to most of these characteristics-based factors is likely to be a proxy for the level of mispricing, rather than risk, especially during high-sentiment periods.

Keywords: Factor beta, Investor sentiment, Mispricing, Risk

JEL Classification: G12

Suggested Citation

Chen, Zhuo and Liu, Bibo and Wang, Huijun and Wang, Zhengwei and Yu, Jianfeng, Investor Sentiment and the Pricing of Characteristics-Based Factors (February 7, 2020). Available at SSRN: https://ssrn.com/abstract=3536063 or http://dx.doi.org/10.2139/ssrn.3536063

Zhuo Chen

Tsinghua University ( email )

43 Chengfu Road
Beijing, 100083
China

Tsinghua University - PBC School of Finance

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

Bibo Liu

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

Huijun Wang

University of Melbourne

198 Berkeley Street
Carlton, Victoria 3053
Australia

Zhengwei Wang

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing 100083
China

Jianfeng Yu (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

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