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Sentiment and covariance characteristics

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  • Tran, Vu Le

Abstract

We propose a bridging model that connects risk-based factor models to sentiment models by using stock characteristics from the asset pricing literature. Investors use stock characteristics as information to form their biased view and hence creating mispricing in stock’s price from its fundamental value. Characteristics also serve as the proxy for the covariance risk to a latent factor. The α from our factor model of mispricing ranges from 0.70% to 1.38% monthly after controlling for other common factors and mispricing measures. Well-known anomalies are only represented in either underpriced or overpriced stocks but not in all the cross-section.

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  • Tran, Vu Le, 2023. "Sentiment and covariance characteristics," International Review of Financial Analysis, Elsevier, vol. 86(C).
    • Handle: RePEc:eee:finana:v:86:y:2023:i:c:s1057521923000492
    DOI: 10.1016/j.irfa.2023.102533
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