Investor Sentiment: Does it Augment the Performance of Asset Pricing Models?

38 Pages Posted: 25 Nov 2016

See all articles by Deven Bathia

Deven Bathia

Queen Mary University of London

Don Bredin

University College Dublin (UCD) - Department of Banking & Finance

Date Written: June 1, 2016

Abstract

This paper examines whether incorporating various investor sentiment measures in conditional asset pricing models can help to capture the impacts of the size, value, liquidity and momentum effects on risk-adjusted returns of the U.S. individual stocks. Using monthly data of individual securities for the period January 1980 to December 2014, we determine the significance of equity fund flow, IPO first day returns, IPO volume, closed-end fund discount, equity put-call ratio, dividend premium, change in margin debt and sentiment index, by including them as conditioning information in asset pricing models. Our results show that sentiment augmented asset pricing models significantly contributes in capturing the impacts of the size, value, liquidity and momentum effects of risk-adjusted returns. In particular, we observe the outperformance of equity fund flow, IPO first day return and put-call ratio in capturing the predictive power of equity characteristics for all the conditional models examined.

Keywords: Investor sentiment, Asset Pricing, Conditioning information

JEL Classification: G12, G14

Suggested Citation

Bathia, Deven and Bredin, Don, Investor Sentiment: Does it Augment the Performance of Asset Pricing Models? (June 1, 2016). Available at SSRN: https://ssrn.com/abstract=2874300

Deven Bathia (Contact Author)

Queen Mary University of London ( email )

The Bancroft Building
Mile End Road
London, E1 4NS
United Kingdom

Don Bredin

University College Dublin (UCD) - Department of Banking & Finance ( email )

School of Business
Blackrock, Co. Dublin, 4
Ireland

HOME PAGE: http://www.ucd.ie/bankingfinance/staff_bredin.html

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