Investor sentiment, risk factors and asset pricing : Evidence from Malaysia

Gunathilaka, Ambagahawatte Gedara Chandana. (2016) Investor sentiment, risk factors and asset pricing : Evidence from Malaysia. PhD thesis, Universiti Malaysia Sarawak.

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Abstract

This study examines pricing implications of aggregate investor sentiment risk for equity returns, in presence of other market wide risk factors. Effects of Size, Book-to-Market, Illiquidity, Momentum, Human capital, and systematic risk of Capital Assets Pricing Model (CAPM) are analyzed using 72 risk-mimicking portfolios under applications of both time series and panel methods for 14 years up to 2013. It devises a unique seven-variable (7-V) index in capturing the investor sentiment risk based up on the methodology of Baker and Wurgler (2007). Risk factors and test portfolios construction follows Fama French approach. Time series and panel dynamic models are tested in a multifactor APT setting. CAPM poorly performs in explaining average stock returns. An asset’s exposure to size, value, momentum, and illiquidity characteristics subordinates CAPM’s explanatory power. Results demonstrate the significance of choice of sentiment-adjusted pricing in Malaysia. The 7-V index shows its efficiency in capturing Malaysian sentiment and power of explaining stock returns by improving efficiency of multifactor pricing models significantly. Evidence leans at describing the investor sentiment as a source of systemic risk.

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