Investor Sentiment and the Pricing of Characteristics-Based Factors

Zhuo Chen, Bibo Liu, Huijun Wang, Zhengwei Wang and Jianfeng Yu

The Review of Financial Studies, 2025, vol. 38, issue 12, 3580-3625

Abstract: Previous research has revealed that return spreads between stocks with high and low characteristics-based factor beta remain insignificant. This study investigates the time variation in the pricing of various characteristics-based factors, uncovering a notable two-regime pattern: high-beta portfolios yield higher returns than low-beta portfolios after high-sentiment periods, while the opposite occurs after low-sentiment periods. Remarkably, this two-regime pattern is completely reversed for macro factors. Mutual fund and hedge fund returns corroborate these findings. Our results suggest that exposure to characteristics-based factors likely represents mispricing levels, particularly during high-sentiment periods, whereas exposure to macro factors likely represents risk, particularly during low-sentiment periods.

Keywords: G12 (search for similar items in EconPapers)
Date: 2025
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