Investor Sentiment and the Pricing of Characteristics-Based Factors
68 Pages Posted: 25 Feb 2020 Last revised: 29 Dec 2023
Date Written: December 28, 2023
Abstract
Previous research reveals that beta-sorted portfolios exhibit large ex post factor beta spreads, yet the return spreads between high- and low-beta stocks remain insignificant. This study investigates time variation in the pricing of various characteristics-based factors, uncovering a notable two-regime pattern: high-beta portfolios yield higher returns than low-beta portfolios post high-sentiment periods, while the opposite occurs post low-sentiment periods. Interestingly, macro-related factors, such as consumption and TFP growth, demonstrate a reversed pattern. Mutual fund and hedge fund returns corroborate these findings. Our results suggest that exposures to characteristics-based factors likely represent mispricing levels, rather than risk, particularly during high-sentiment periods.
Keywords: Factor beta, Investor sentiment, Mispricing, Risk
JEL Classification: G12
Suggested Citation: Suggested Citation