# A comparison of investors’ sentiments and risk premium effects on valuing shares

## Summary (2 min read)

### 1 Introduction

- Ohlson s model has the following attractive features.
- Identifying these factors and measuring their explanatory power on share prices can indicate at what extent compared to the observed ones can explain cross-sectional and time-series, total variation of share prices from their fundamental values.
- Section 2 presents the share price valuation model, while Section 3 the empirical methodology of the paper and it discuss the estimation results.

### 3 Empirical analysis

- To investigate the relative importance of risk premium and/or sentiment e¤ects in explaining deviations of share prices from their fundamental values, i.e., Pit P it, the authors consider the following panel data model: (3) Model (2) considers three di¤erent groups of variables in explaining Pit P it.
- The rst contains variables zijt, re ecting J-di¤erent rm speci c e¤ects, like the size of a rm i (denoted as SIZE), its earning-price, and its book-to-market and dividend-price ratios, denoted respectively as E=P , B=M and D=P .
- These variables can capture the Fama-French risk premium factors.
- These variables are common, for all shares i.
- Panel data methods enable us to estimate the time series observations of factors fmt from the residuals of model (2), obtained in a rst step, by exploiting the cross-section dimension of the data.

### 3.1 Data

- The authors data is expressed in nominal values and have annual frequency.
- The stock market annual return (MARKET ) is calculated based on the FTSE100 UK price index.
- The sentiment variable SENT is the percentage change of sentiment index, denoted as SI.
- Earnings forecasts are based on combined estimates of the analysts about a company s earnings per share that concerns the next scal year.
- Finally, the results of the table indicate that there is a very small degree of correlation between the rm speci c and macroeconomic variables of the model, which means that these two di¤erent groups of variables may be thought of as independent sources of risks.

### 3.2 Estimates

- To estimate model (2), the authors will employ the mean group panel data estimator (see Pesaran and Smith (1995)).
- Estimates of model (2), with and without unobserved factors fmt, based on the above estimation procedure are presented in Table 2.
- Regarding the group of macroeconomic variables, their results indicate that TERM , EXCH and DF have a signi cant impact on Pit P it, at the 5% level, for all the speci - cations of the model considered.
- They indicate that the e¤ects of investors sentiments on Pit P it become stronger than those based on the mean group estimator.
- This is also true for the speci cation of the model including variable CRISIS into its RHS.

### 4 Conclusions

- Based on a share valuation model which relies on analysts earnings forecasts and book values, this paper shows that deviations of the market share prices from their fundamental values can be explained both by risk premium an/or investors sentiment e¤ects.
- The paper provides clear cut evidence that positive sentiment e¤ects (due, for instance, to investors optimism) lead to overvaluation of the current market share prices, compared to their fundamental values.
- On the other hand, sentiment e¤ects occurring in periods of nancial crisis, often associated with collapsing bubbles, lead to share price corrections to their fundamental values.
- Regarding the risk premium e¤ects, the results of the paper show that these can be captured by rm speci c variables, like the book-to-market and dividend-price ratios, and macroeconomic variables, like the spread between long and short term government yields, the change of the three month T-bill rate and the e¤ective real exchange rate.

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### "A comparison of investors’ sentimen..." refers background in this paper

...…the other hand, the fundamental prices P it are calculated based on data for earnings and book values on the date of the yearly nancial statement announcements.1 The variable of SIZE is calculated as the market share price Pit times the number of shares in circulation (see Fama and French (1993))....

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...…model, this paper examines if deviations of share prices from their fundamental values can be explained by missing risk premium e¤ects (see, Fama and French (1993,2014)) and/or investors behavioral biases (e.g., excessive optimism or other psychological characteristics referred to as…...

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