Sentiment and Covariance Characteristics

59 Pages Posted: 24 Jan 2021

Date Written: December 3, 2020

Abstract

We propose a bridging model that connects risk-based factor models to sentiment models by using characteristics. Investors use stock characteristics as information to form their biased view and hence creating mispricing. Characteristics also serve as the proxy for the covariance risk to a latent factor. The α from our factor model of mispricing ranges from 0.70% to 1.38% monthly after controlling for other common factors and mispricing measures. Well-known anomalies are only represented in either underpriced or overpriced stocks but not in all the cross-section.

Keywords: Characterisitcs, Sentiment Model, Factor Model, Risk

JEL Classification: G11, G12

Suggested Citation

Tran, Vu Le, Sentiment and Covariance Characteristics (December 3, 2020). Available at SSRN: https://ssrn.com/abstract=3741921 or http://dx.doi.org/10.2139/ssrn.3741921
No contact information is available for Vu Le Tran

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