dc.description.abstract | This study contains two essays about pricing anomalies and investor sentiment.
Essay 1 examines the robustness of covariance risk and pricing anomalies. By trimming extreme observations, we reexamine the competition between the factor model and the characteristic model. Although we use almost the same sample period (July 1963 to June 2002, 39 years) as Daniel and Titman (1997), our results indicate that after trimming extreme observations the three-factor risk model explains the value premium better than the characteristic model. For size premium, like Davis, Fama, and French (2000) and Daniel, Titman, and Wei (2001), neither the three-factor nor the characteristic model can be rejected. But when we exclude influential months, our evidence turns to support the characteristic model. Then we investigate whether the results are related to the January seasonality. Our results indicate that in non-January months the characteristic model explains the size premium better than the three-factor risk model.
In essay 2, we explore the role of investor sentiment as a common factor in the spirit of Ross’s (1976) APT. We study the explanatory power of market sentiments, macroeconomic factors, and stock characteristics in capturing the variations in the cross-sectional stock returns. Our result shows that the sentiment premium is highly significant, and is independent of both the market factor and macroeconomic factors identified by Chen, Roll, and Ross (1986). It appears that investor sentiment captures market participants’ expectation of the future market prospects not fully capture by the common macroeconomic variables. However, the sentiment premium is absorbed by both firm size and book-to-market value. The result provides an evidence supporting the behavioral argument of size effect and value premia. | en_US |