Market Risk and Speculation Factors

38 Pages Posted: 18 Aug 2022 Last revised: 2 Sep 2022

See all articles by Soroush Ghazi

Soroush Ghazi

University of Alabama - Department of Economics, Finance and Legal Studies

Mark Schneider

University of Alabama - Department of Economics, Finance and Legal Studies

Date Written: August 11, 2022

Abstract

We decompose the excess market return into speculation and non-speculation components. The former is negative and predicted by market sentiment. The latter is positive and not predicted by sentiment. The speculation component explains roughly 30% of the variation in the excess market return. In the cross-section, the decomposition helps identify the risk and mispricing components of CAPM anomalies. Although the Fama-French factors comove with the market factor, this comovement is due to the speculation component. The decomposition resolves an anomaly pertaining to investor lottery preference. The decomposition also reconciles and unifies conflicting evidence on the pricing of left-tail risk.

Keywords: Stock Market Anomalies, Risk Premium, Speculation Premium, Left-tail Risk

JEL Classification: D8, G40, G41

Suggested Citation

Ghazi, Soroush and Schneider, Mark, Market Risk and Speculation Factors (August 11, 2022). Available at SSRN: https://ssrn.com/abstract=4187398 or http://dx.doi.org/10.2139/ssrn.4187398

Soroush Ghazi (Contact Author)

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States

HOME PAGE: http://sites.google.com/view/soroush-ghazi

Mark Schneider

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

361 Stadium Dr, Ste 200
Tuscaloosa, AL 35487
United States

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