Does Social Media Sentiment Matter in the Pricing of U.S. Stocks?
60 Pages Posted: 3 Feb 2021
Date Written: January 22, 2021
This paper applies a recently developed social media-based sentiment proxy for the construction of a new risk factor for sentiment-augmented asset pricing models on U.S. equities. Accounting for endogeneity, autocorrelation and heteroskedasticity in a GMM framework, we ﬁnd that the inclusion of sentiment signiﬁcantly improves the performance of the ﬁve-factor model from Fama and French (2015, 2017) for di ﬀ erent industry and style portfolios like size, value, proﬁtability, investment. The sentiment risk premium provides the missing component in the behavioral asset pricing theory of Shefrin and Belotti (2008) and (partially) resolves the pricing puzzles of small extreme growth, small extreme investment stocks and small stocks that invest heavily despite low proﬁtability.
Keywords: Asset pricing, behavioral ﬁnance, ﬁnancial markets, investor sentiment, sentiment risk premium, GMM
JEL Classification: C32, C53, G12, G41
Suggested Citation: Suggested Citation