Investor Sentiment and the Pricing of Characteristics-Based Factors

68 Pages Posted: 25 Feb 2020 Last revised: 29 Dec 2023

See all articles by Zhuo Chen

Zhuo Chen

Tsinghua University - PBC School of Finance

Bibo Liu

Tsinghua University - PBC School of Finance

Huijun Wang

Auburn University

Zhengwei Wang

Tsinghua University - PBC School of Finance

Jianfeng Yu

Tsinghua University - PBC School of Finance

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

Chen, Zhuo and Liu, Bibo and Wang, Huijun and Wang, Zhengwei and Yu, Jianfeng, Investor Sentiment and the Pricing of Characteristics-Based Factors (December 28, 2023). PBCSF-NIFR Research Paper, Available at SSRN: https://ssrn.com/abstract=3536063 or http://dx.doi.org/10.2139/ssrn.3536063

Zhuo Chen

Tsinghua University - PBC School of Finance

No. 43, Chengdu Road
Haidian District
Beijing, Beijing 100083
China

Bibo Liu

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

Huijun Wang

Auburn University ( email )

415 West Magnolia Avenue
Auburn, AL 36849
United States

Zhengwei Wang

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing 100083
China

Jianfeng Yu (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing 100083
China

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
430
Abstract Views
1,749
Rank
124,442
PlumX Metrics