Essays on Sentiment in Asset Pricing

Eric Tham, PhD
Asset Pricing, Behavioural finance, Habit utility models, Market sentiment, Precautionary savings motive, Social Media, Mixture of Distributions, Natural Language Processing, Ambiguity Aversion, Disagreement

Abstract :

Sentimental Habits: Habits and sentiment are key psychological behaviours in asset pricing. This paper studies the interactive impacts of sentiment and habits on asset pricing using the Campbell and Cochrane (1999) habit model as a framework model. A positive sentiment shock emanating from firms is modelled in consumption drift and the habits sensitivity. It has a lagged effect on intertemporal consumption and increases the riskfree rate by an increased habit sensitivity and the precautionary savings motive. The increased habit sensitivity also increases risk-taking activity. The model offers a behavioural explanation of the value premium puzzle in the context of habit models due to relatively lower price-consumption ratios under negative sentiment.

Impact of Social and News Media on Financial Markets: Textual news from the financial news and social media are the primary sources of financial information for investors. I use textual analysis to aggregate the beliefs and opinions from these heterogenous sources to construct two indices - disagreement and divergence index. The divergence index uses a mixture of distributions model that comprises disagreement and the source individual uncertainties. The divergence index is used in empirical testing against the market returns and helps to account for the fundamental relation between risks and returns as an omitted variable bias. Empirically, the paper finds that the financial news media have a bigger influence on asset prices than social media except since the last recession from Jun 2009 to Nov 2016.

Publication date of the thesis

Thesis committee

Supervisor: Laurent Calvet, EDHEC Business School

External reviewer: Harrison Hong, Columbia

Other committee member: Nikolaos Tessaromatis, EDHEC Business School