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The mispricing of equity risk: behavioral and corporate leverage factors

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  • Dorsaf Ben Aissia

    (University of Manouba)

Abstract

In this paper, we investigate the risk anomaly in equity market. Our focus is to assess the relationship between skewness preference, investor sentiment, corporate leverage and the mispricing of equity risk. Based on data of all the firms of the CAC All Tradable index over the period 2005 and 2015, we find that investor preference for skewed stocks and investor sentiment are strong predictors of stock returns. In particular, they are positively related to both market and total risks. This result supplies evidence that investor irrationality maters in stocks’ valuation. In addition, we find that that leverage is inversely related to equity risk and explains why French stocks are undervaluated. Our results are robust to the usage of different measures of total investor sentiment and corporate leverage.

Suggested Citation

  • Dorsaf Ben Aissia, 2017. "The mispricing of equity risk: behavioral and corporate leverage factors," Journal of Asset Management, Palgrave Macmillan, vol. 18(6), pages 421-432, October.
    • Handle: RePEc:pal:assmgt:v:18:y:2017:i:6:d:10.1057_s41260-017-0041-z
    DOI: 10.1057/s41260-017-0041-z
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    Cited by:

    1. Dorsaf Ben Aissia & Narjess Skhiri Hellara, 2019. "Systematic risk, the tradeoff of leverage and IPO first-day returns," Review of Quantitative Finance and Accounting, Springer, vol. 53(1), pages 239-256, July.

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    More about this item

    Keywords

    mispricing of equity risk; skewness preference; investor sentiment; corporate leverage;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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