Sentiment or habits: Why not both?

Tham, Eric (2022) Sentiment or habits: Why not both? The Journal of Financial Research. (In Press)

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Abstract

Habits and sentiment are important psychological behaviors in asset pricing. In this article I nest consumer sentiment as a risk factor into the Campbell–Cochrane (CC) habit model and examine its impact on asset prices. The model provides an economic mechanism for the pricing of sentiment risk through its impact on habit sensitivity and equilibrium habit levels but finds its market price of risk much lower than fundamentals. The additional sentiment factor does not improve the CC model, with both models returning a matched moments error of 12% from 1980Q1 to 2021Q4. The sentiment factor, however, subsumes risk aversion with a lower resulting risk coefficient than the CC model without sentiment. Furthermore, the model shows that during the COVID period, the risk premium was driven more by consumption growth than sentiment.

Item ID: 76632
Item Type: Article (Research - C1)
ISSN: 1475-6803
Copyright Information: © 2022 The Authors. Journal of Financial Research published by Wiley Periodicals LLC on behalf of The Southern FinanceAssociation and the Southwestern Finance Association. This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium, provided the original work is properly cited.
Date Deposited: 03 Nov 2022 02:17
FoR Codes: 38 ECONOMICS > 3801 Applied economics > 380102 Behavioural economics @ 50%
38 ECONOMICS > 3801 Applied economics > 380107 Financial economics @ 50%
SEO Codes: 15 ECONOMIC FRAMEWORK > 1502 Macroeconomics > 150209 Savings and investments @ 33%
15 ECONOMIC FRAMEWORK > 1502 Macroeconomics > 150203 Economic growth @ 33%
15 ECONOMIC FRAMEWORK > 1505 Microeconomics > 150501 Consumption @ 34%
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