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The world price of sentiment risk |
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| Affiliation: | 1. University of Washington Bothell, School of Business, Bothell, WA 98011, United States;2. University of Massachusetts, Amherst, Isenberg School of Management, Amherst, MA 01003, United States;1. Ivey Business School, University of Western Ontario, 1255 Western Road – Room 3322, London, Ontario N6G 0N1, Canada;2. Rowe School of Business, Dalhousie University, Room 4090, 6100 University Avenue, Halifax, Nova Scotia B3H 4R2, Canada;3. School of Business, Fudan University, 7th Floor, Li Dasan Building, 670 Guoshun Road, Yangpu District, Shanghai, China |
| Abstract: | This paper examines whether sentiment can be considered a priced source of risk on international financial markets. We investigate whether residual sentiment is rewarded with a risk premium if added to a model with macroeconomic fundamentals and analyze the time-variation of the respective risk premia. The analysis is performed in the framework of a conditional multiple-beta pricing model and focusses on the excess returns of the G7 stock markets in the period from February 1999 to February 2012. The obtained results indicate that sentiment indeed earns a significant risk premium of around 2% p.a. on the considered markets. |
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