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A comparison of investors’ sentiments and risk premium effects on valuing shares

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  • Karavias, Yiannis
  • Spilioti, Stella
  • Tzavalis, Elias

Abstract

This paper investigates at what extent deviations between market share prices and their fundamental values can be explained by risk premium and/or investors’ sentiment effects. This is done based on recent panel data econometric techniques controlling for the effects of unobserved common factors on our estimation and inference procedures. To calculate the fundamental values of the shares, the paper relies on book value and yearly earnings forecasts of the listed companies, over the period 1987–2012. The results of the paper indicate that share price deviations from their fundamental values can be explained by both risk premium and sentiment effects. The latter lead to overvaluation of market share prices during normal market time times. In contrast, during periods of financial crises, share prices tend to reverse to their fundamental values. The unobserved common factors identified by fitting our model into the data do not add too much to the explanatory power of it, compared to the observed economic variables often used in the literature to capture the sentiment and/or risk premium effects.

Suggested Citation

  • Karavias, Yiannis & Spilioti, Stella & Tzavalis, Elias, 2016. "A comparison of investors’ sentiments and risk premium effects on valuing shares," Finance Research Letters, Elsevier, vol. 17(C), pages 1-6.
  • Handle: RePEc:eee:finlet:v:17:y:2016:i:c:p:1-6
    DOI: 10.1016/j.frl.2015.10.017
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    Cited by:

    1. Yiannis Karavias & Stella Spilioti & Elias Tzavalis, 2021. "Investor sentiment effects on share price deviations from their intrinsic values based on accounting fundamentals," Review of Quantitative Finance and Accounting, Springer, vol. 56(4), pages 1593-1621, May.
    2. Jasman Tuyon & Zamri Ahmad, 2018. "Behavioural Asset Pricing Determinants in a Factor and Style Investing Framework," Capital Markets Review, Malaysian Finance Association, vol. 26(2), pages 32-52.

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    More about this item

    Keywords

    Share prices; Risk premium; Sentiments; Panel data; Firm specific effects;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • 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
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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