Investor Sentiment and the Pricing of Characteristics-Based Factors

ZHUO CHEN; Bibo Liu; Huijun Wang; Zhengwei Wang; Jianfeng Yu

doi:10.1093/rfs/hhaf053

Investor Sentiment and the Pricing of Characteristics-Based Factors

ZHUO CHEN¹; Bibo Liu¹; Huijun Wang²; Zhengwei Wang¹; Jianfeng Yu³

¹ PBC School of Finance, Tsinghua University · ² Auburn University · ³ PBC School of Finance, Tsinghua University and Hong Kong University of Science and Technology ,

Review of Financial Studies 2025

Abstract Previous research has revealed that return spreads between stocks with high and low characteristics-based factor beta remain insignificant. This study investigates the time variation in the pricing of various characteristics-based factors, uncovering a notable two-regime pattern: high-beta portfolios yield higher returns than low-beta portfolios after high-sentiment periods, while the opposite occurs after low-sentiment periods. Remarkably, this two-regime pattern is completely reversed for macro factors. Mutual fund and hedge fund returns corroborate these findings. Our results suggest that exposure to characteristics-based factors likely represents mispricing levels, particularly during high-sentiment periods, whereas exposure to macro factors likely represents risk, particularly during low-sentiment periods.

DOI: 10.1093/rfs/hhaf053
Volume: 38 (12)
Pages: 3580-3625
Language: en
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