Value premium, sentiment and uncertainty in Latin America: reason or emotion?

Purpose - This article aims to analyze whether local investor sentiment is causing mispricing in value premium in emerging Latin American countries and whether uncertainty mitigates this effect. Design/methodology/approach - We analyzed 428 non-financial publicly traded firms in Argentina, Brazil, Chile and Mexico, accumulating 1,067,930 daily observations. To measure investor sentiment, we utilized both market and firm-level indexes. In addition, we incorporated the Economic Policy Uncertainty (EPU), World Uncertainty Index (WUI), Chicago Board Options Exchange (CBOE) Volatility (VIX) and Google Trends® to represent uncertainty. We regressed high minus low (HML) on market sentiment and uncertainty, and we employed a six-factor model with the risk factor based on firm-specific investor sentiment, competing with HML. Findings - The main results show that HML yields positive returns in most countries studied. Surprisingly, market sentiment does not affect HML as expected; instead, uncertainty emerges as a more influential factor, reducing HML’s return. Factor sentiment contributes to asset pricing in countries with favorable political-economic conditions. The negative impact of uncertainty and external sentiment suggests that reason prevails over emotion in these markets, suggesting that investors are more rational than expected. Originality/value - We contribute to the literature by examining the political-economic situation and market sentiment proxies, incorporating low-cost uncertainty and rapid information response through news channels (EPU/WUI) and the Internet (TRENDS). Additionally, we expand asset pricing literature by identifying a new risk factor in emerging Latin American countries. Our main contribution is evaluating the viability of investing in the value premium, a widely adopted strategy covered by the media.