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News-based sentiment and the value premium

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  • Fabozzi, Francesco A.
  • Nazemi, Abdolreza

Abstract

The literature has documented that growth stocks are long-duration assets that are sensitive to shocks to the market discount rate, and value stocks, being short-duration assets, are sensitive to shocks to future cash flows. However, there is an ongoing debate as to whether the co-movement of value stocks with other value stocks and growth stocks with other growth stocks is due to similarities in cash-flow characteristics (i.e., the fundamental-based view) or due to a time-varying discount rate applied to cash flows (i.e., the sentiment-based view). While most studies take a fundamental approach to answer this question, we provide a sentiment-based explanation of the value premium by using the sentiment of news articles pertaining to cash-flow risks and discount-rate shocks. Our findings are consistent with the literature for the main drivers of the value premium but in support of the sentiment-based view, not through a rejection of the fundamental view but through a novel method for quantifying the time-varying discount rate that investors apply to cash flows.

Suggested Citation

  • Fabozzi, Francesco A. & Nazemi, Abdolreza, 2023. "News-based sentiment and the value premium," Journal of International Money and Finance, Elsevier, vol. 136(C).
    • Handle: RePEc:eee:jimfin:v:136:y:2023:i:c:s0261560623000657
    DOI: 10.1016/j.jimonfin.2023.102864
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    More about this item

    Keywords

    Asset pricing; Style investing; Value premium; News sentiment;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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