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Sentiment Risk Premia in the Cross-Section of Global Equity and Currency Returns

Roland Fuess, Massimo Guidolin () and Christian Koeppel
Authors registered in the RePEc Author Service: Roland Füss ()

No 19116, BAFFI CAREFIN Working Papers from BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy

Abstract: This paper introduces a new sentiment-augmented asset pricing model in order to provide a comprehensive understanding of the role of non-fundamental risk factors. We find that news and social media search-based indicators that measure the aggregate investor sentiment are significantly related to excess returns across different asset classes and markets. Adding sentiment factors to both classical and more recent state-of-the-art pricing models leads to a significant increase in model performance. Following a two-stage Fama-MacBeth procedure, our modified pricing model obtains positive estimates of the risk premium for negative sentiment for global equity markets. We interpret them as measures of additional market uncertainty not captured by standard risk factors. Negative sentiment captures investors' fear, for which they demand an additional risk premium on sentiment-sensitive assets. Consequently, our empirical results contribute to the explanation of the cross-section of average, international excess equity and foreign exchange returns.

Keywords: Sentiment; Cross-section of international equity indices; Currency returns; Fama-MacBeth risk premia estimation (search for similar items in EconPapers)
Pages: 64
Date: 2019
New Economics Papers: this item is included in nep-fmk, nep-ifn and nep-upt
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