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Sentiment Risk Premia In The Cross-Section of Global Equity

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  • Roland Füss
  • Massimo Guidolin
  • Christian Koeppel

Abstract

This paper introduces a new sentiment-augmented asset pricing model in order to provide a comprehensive understanding of the role this new type of risk factors. We find that news and social media search-based indicators are significantly related to excess returns of international equity indices. Adding sentiment factors to both classical and more recent pricing models leads to a significant increase in model performance. Following the Fama-MacBeth procedure, our modified pricing model obtains positive estimates of the risk premium for positive sentiment, while being negative for negative sentiment. Our results contribute to the explanation of the global cross-sectional of average excess returns and are robust for fundamental factors, momentum, idiosyncratic volatility, skewness, kurtosis, and international currencies.

Suggested Citation

  • Roland Füss & Massimo Guidolin & Christian Koeppel, 2019. "Sentiment Risk Premia In The Cross-Section of Global Equity," Working Papers on Finance 1913, University of St. Gallen, School of Finance, revised May 2020.
    • Handle: RePEc:usg:sfwpfi:2019:13
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    More about this item

    Keywords

    Asset pricing; behavioral finance; financial markets; investor sentiment; sentiment risk premium;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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