IDEAS home Printed from https://ideas.repec.org/a/vrs/subboe/v69y2024i2p26-39n1003.html
   My bibliography  Save this article

The Nexus Between Investors’ Sentiment and Hedge Funds Risk Premiums

Author

Listed:
  • Vodă Tudor-Ovidiu

    (Babes-Bolyai University, Romania)

Abstract

In this study, we analyzed how the systematic risk of hedge funds affects different portfolio strategies. Using monthly returns data from a sample of developed market hedge funds grouped by five strategies, we identified the systematic factors influencing returns variation from January 2003 to December 2023. Market, size effect, momentum, investment effect, and bond spread were found to be the main risk factors explaining hedge fund returns dynamics. We proposed an enhanced version of the Fung and Hsieh (2004a) model, which demonstrated improved representativity with Baker and Wurgler sentiment index included as a risk premium. The quantile regression revealed that for most strategies, the estimated models performed better for the bottom quantiles.

Suggested Citation

  • Vodă Tudor-Ovidiu, 2024. "The Nexus Between Investors’ Sentiment and Hedge Funds Risk Premiums," Studia Universitatis Babeș-Bolyai Oeconomica, Sciendo, vol. 69(2), pages 26-39.
  • Handle: RePEc:vrs:subboe:v:69:y:2024:i:2:p:26-39:n:1003
    DOI: 10.2478/subboec-2024-0008
    as

    Download full text from publisher

    File URL: https://doi.org/10.2478/subboec-2024-0008
    Download Restriction: no

    File URL: https://libkey.io/10.2478/subboec-2024-0008?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Malcolm Baker & Jeffrey Wurgler, 2006. "Investor Sentiment and the Cross‐Section of Stock Returns," Journal of Finance, American Finance Association, vol. 61(4), pages 1645-1680, August.
    2. Malcolm Baker & Jeffrey Wurgler, 2007. "Investor Sentiment in the Stock Market," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 129-152, Spring.
    3. Fama, Eugene F. & French, Kenneth R., 2012. "Size, value, and momentum in international stock returns," Journal of Financial Economics, Elsevier, vol. 105(3), pages 457-472.
    4. John M. Griffin, 2002. "Are the Fama and French Factors Global or Country Specific?," The Review of Financial Studies, Society for Financial Studies, vol. 15(3), pages 783-803.
    5. Fama, Eugene F. & French, Kenneth R., 2015. "A five-factor asset pricing model," Journal of Financial Economics, Elsevier, vol. 116(1), pages 1-22.
    6. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    7. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    8. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    9. Titman, Sheridan & Wei, K. C. John & Xie, Feixue, 2004. "Capital Investments and Stock Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(4), pages 677-700, December.
    10. William Fung & David A. Hsieh, 2004. "Hedge Fund Benchmarks: A Risk-Based Approach," Financial Analysts Journal, Taylor & Francis Journals, vol. 60(5), pages 65-80, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Adam Zaremba & Jacob Koby Shemer, 2018. "Price-Based Investment Strategies," Springer Books, Springer, number 978-3-319-91530-2, December.
    2. Cakici, Nusret & Zaremba, Adam, 2022. "Salience theory and the cross-section of stock returns: International and further evidence," Journal of Financial Economics, Elsevier, vol. 146(2), pages 689-725.
    3. José Luis Miralles-Quirós & María Mar Miralles-Quirós & José Manuel Nogueira, 2020. "Sustainable Development Goals and Investment Strategies: The Profitability of Using Five-Factor Fama-French Alphas," Sustainability, MDPI, vol. 12(5), pages 1-16, February.
    4. Shiyang Huang & Xin Liu & Dong Lou & Christopher Polk, 2024. "The Booms and Busts of Beta Arbitrage," Management Science, INFORMS, vol. 70(8), pages 5367-5385, August.
    5. Hanauer, Matthias X. & Lauterbach, Jochim G., 2019. "The cross-section of emerging market stock returns," Emerging Markets Review, Elsevier, vol. 38(C), pages 265-286.
    6. Huber, Daniel & Jacobs, Heiko & Müller, Sebastian & Preissler, Fabian, 2023. "International factor models," Journal of Banking & Finance, Elsevier, vol. 150(C).
    7. Ailie Charteris & Mukashema Rwishema & Tafadzwa-Hidah Chidede, 2018. "Asset Pricing and Momentum: A South African Perspective," Journal of African Business, Taylor & Francis Journals, vol. 19(1), pages 62-85, January.
    8. Bartram, Söhnke M. & Grinblatt, Mark, 2021. "Global market inefficiencies," Journal of Financial Economics, Elsevier, vol. 139(1), pages 234-259.
    9. Montone, Maurizio, 2023. "Beta, value, and growth: Do dichotomous risk-preferences explain stock returns?," Journal of Behavioral and Experimental Finance, Elsevier, vol. 39(C).
    10. Tong Fang & Zhi Su & Libo Yin, 2021. "Does the green inspiration effect matter for stock returns? Evidence from the Chinese stock market," Empirical Economics, Springer, vol. 60(5), pages 2155-2176, May.
    11. Assoe, Kodjovi & Attig, Najah & Sy, Oumar, 2024. "The battle of factors," Global Finance Journal, Elsevier, vol. 62(C).
    12. Cakici, Nusret & Zaremba, Adam, 2023. "Recency bias and the cross-section of international stock returns," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 84(C).
    13. Foye, James & Valentinčič, Aljoša, 2020. "Testing factor models in Indonesia," Emerging Markets Review, Elsevier, vol. 42(C).
    14. Zaremba, Adam & Szyszka, Adam & Long, Huaigang & Zawadka, Dariusz, 2020. "Business sentiment and the cross-section of global equity returns," Pacific-Basin Finance Journal, Elsevier, vol. 61(C).
    15. Liang, Woan-lih, 2016. "Sensitivity to investor sentiment and stock performance of open market share repurchases," Journal of Banking & Finance, Elsevier, vol. 71(C), pages 75-94.
    16. Rilwan Sakariyahu & Audrey Paterson & Eleni Chatzivgeri & Rodiat Lawal, 2024. "Chasing noise in the stock market: an inquiry into the dynamics of investor sentiment and asset pricing," Review of Quantitative Finance and Accounting, Springer, vol. 62(1), pages 135-169, January.
    17. Robert F. Stambaugh & Yu Yuan, 2017. "Mispricing Factors," The Review of Financial Studies, Society for Financial Studies, vol. 30(4), pages 1270-1315.
    18. Thomas Nitschka, 2016. "Is There a Too-Big-to-Fail Discount in Excess Returns on German Banks’ Stocks?," International Finance, Wiley Blackwell, vol. 19(3), pages 292-310, December.
    19. Hoang, Khoa & Huang, Ronghong & Truong, Helen, 2023. "Resurrecting the market factor: A case of data mining across international markets," Pacific-Basin Finance Journal, Elsevier, vol. 82(C).
    20. Cakici, Nusret & Zaremba, Adam, 2021. "Who should be afraid of infections? Pandemic exposure and the cross-section of stock returns," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 72(C).

    More about this item

    Keywords

    Hedge funds; Risk premiums; Sentiment index; Asset pricing;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:vrs:subboe:v:69:y:2024:i:2:p:26-39:n:1003. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Peter Golla (email available below). General contact details of provider: https://www.sciendo.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.