Asset valuation impact of investor sentiment: A revised Fama–French five-factor model

Abderrazak Dhaoui and Nesrine Bensalah ()
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Nesrine Bensalah: University of Sousse

Journal of Asset Management, 2017, vol. 18, issue 1, No 2, 16-28

Abstract: ABSTRACT Using the US stock market (NYSE) data, this paper investigates the asset valuation predictive power of investor sentiment. For this purpose, we conducted a revised Fama and French five-factor model by incorporating two additional variables. Moreover, we consider three indicators to classify objectively the selected portfolios, namely the value (book-to-market), the profitability, and the investment. Empirical findings confirm the validity of the standard Fama and French five-factor model in predicting the expected returns. The results show, especially, that the revised model incorporating investor sentiment index performs better than the expected returns. This can be with great strategic implication. Decisions makers are incited, indeed, to incorporate psychological aspect of investors in order to know how the economy really works. In other words, decision makers are recommended to understand how the asset value behaves if investors are not fully rational.

Keywords: asset valuation; Fama and French five-factor model; investor sentiment (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (2)

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DOI: 10.1057/s41260-016-0027-2

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