Essays on Asset Pricing and Portfolio Optimization
This doctoral thesis focuses on the e?ects of investor sentiment on asset pricing and the challenges of portfolio optimization under parameter uncertainty. The ?rst essay Sentiment risk premia in the cross-section of global equity applies a recently developed sentiment proxy to the construction of a new risk factor and provides a comprehensive understanding of its role in sentiment-augmented asset pricing models for international equity indices. We empirically demonstrate the existence of a statistically signi?cant and economically relevant sentiment premium. Di?erentiating between developed and emerging markets we reveal di?erent patterns of return reversals / persistence. Our results contribute to the explanation of global cross-sectional average excess returns, demonstrating superiority in terms of predictive power when compared to competing de?nitions of sentiment. The second essay Does social media sentiment matter in the pricing of U.S. stocks? ?nds that the inclusion of micro-grounded, social media-based sentiment signi?cantly improves the performance of the ?ve-factor model from Fama and French (2015, 2017). This holds for di?erent industry and style portfolios such as size, value, pro?tability, and investment. Applying a robust GMM estimator, the sentiment risk premium provides the missing component in the behavioral asset pricing theory of Shefrin and Belotti (2008) and (partially) resolves the pricing puzzles of small extreme growth, small extreme investment stocks and small stocks that invest heavily despite low pro?tability. The third essay Diversifying estimation errors: An e?cient averaging rule for portfolio optimization proposes a combination of established minimum-variance strategies to minimize the expected out-of-sample variance. The proposed averaging rule overcomes the strategy selection problem and diversi?es estimation errors of the strategies included in our rule. Extensive simulations show that the contributions of estimation errors to the out-of-sample variances are uncorrelated between the considered strategies. We therefore conclude that averaging over multiple strategies o?ers sizable diversi?cation bene?ts.
sentiment risk premium
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Universität St. Gallen