Sentiment and Covariance Characteristics

60 Pages Posted: 7 Jul 2022

See all articles by Vu Le Tran

Vu Le Tran

Gjensidige Pensjonsforsikring AS; Nord University

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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: Characteristics, Sentiment Model, Factor Model, Risk

Suggested Citation

Tran, Vu Le, Sentiment and Covariance Characteristics. Available at SSRN: https://ssrn.com/abstract=4156292

Vu Le Tran (Contact Author)

Gjensidige Pensjonsforsikring AS ( email )

Schweigaards gate 14
Oslo, 0185
Norway

Nord University ( email )

Universitetsalléen 11
8049 Bodo
Norway

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