Risk Premium and Fear of Investors in Crisis’ Periods: An Empirical Approach Based on Fama–French and Carhart Factor Models

Antonios Pentsas, Paraskevi Boufounou, Kanellos Toudas and Ioannis Katsampoxakis ()
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Antonios Pentsas: School of Applied Mathematical and Physical Sciences, National Technical University of Athens, 15780 Athens, Greece
Paraskevi Boufounou: Department of Economics, National and Kapodistrian University of Athens, 15771 Athens, Greece
Kanellos Toudas: Department of Agribusiness and Supply Chain Management, Agricultural University of Athens, 11855 Athens, Greece
Ioannis Katsampoxakis: Department of Statistics and Actuarial-Financial Mathematics, University of the Aegean, 83200 Karlovassi, Greece

JRFM, 2024, vol. 17, issue 7, 1-25

Abstract: This study aims to answer the question about the interactions between “investors’ fear”, two factors proposed by Fama & French, the Carhart momentum factor, andthe risk premium, and how these interactions were affected by two financial crises, the Dot-Com and Sub-Prime crises. This paper is the first empirical study that considers the effects of these financial crises. It is of critical importance as it changes the specificity of the empirical models for different periods, significantly affecting the results compared to previous research work. The main findings include a general negative change in fear over all of the sub-periods. Secondly, no consistent positive trend was observed in any of the risk premiums over time. After each crisis, the relationships between the endogenous variables had significant changes. More specifically, investors’ fear, on the first day of the week, appears to be systematically higher across all sub-periods except during the Sub-Prime crisis. Finally, after the Sub-Prime financial crisis, there is an almost complete loss of the explanatory power of the VAR models. Although fear does not seem to affect risk premiums or momentum, it was nevertheless found that the results are sensitive to the specification of the models.

Keywords: crisis; Dot-Com; Sub-Prime; Fama–French; Carhart factor; fear of investors (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2024
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