Sentiment and Covariance Characteristics
63 Pages Posted: 5 Sep 2022 Last revised: 15 Feb 2023
There are 3 versions of this paper
Sentiment and Covariance Characteristics
Sentiment and Covariance Characteristics
Date Written: January 10, 2023
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: Suggested Citation