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Can investor sentiment predict the European size premium? An empirical investigation of regional size premium predictability

Ziemer, Julian LU and Arttu, Lappalainen (2023) NEKN02 20231
Department of Economics
Abstract
Research on the determinants of the size premium, i.e. that small stocks on average outperform
large stocks, has traditionally focused on financial and macroeconomic factors. However,
recent academic studies shed light on the influence of behavioral factors on the size premium,
specifically investor sentiment. In line with this research, our study analyzes the influence of
investor sentiment measures on the next periods’ European size premium. To comprehensively
capture the variation of the utilized sentiment measures, we further conduct a principal
component analysis. Coinciding with behavioral models, we identify that the size premium
rises following optimism and declines following pessimism among investors. Our analysis
reveals... (More)
Research on the determinants of the size premium, i.e. that small stocks on average outperform
large stocks, has traditionally focused on financial and macroeconomic factors. However,
recent academic studies shed light on the influence of behavioral factors on the size premium,
specifically investor sentiment. In line with this research, our study analyzes the influence of
investor sentiment measures on the next periods’ European size premium. To comprehensively
capture the variation of the utilized sentiment measures, we further conduct a principal
component analysis. Coinciding with behavioral models, we identify that the size premium
rises following optimism and declines following pessimism among investors. Our analysis
reveals that market-based sentiment measures such as the VSTOXX exhibit highest efficacy in
predicting the European size premium, while survey-based measures exhibit low predicting
power. The most effective results in predicting the size premium, we obtain through the
implementation of a market-based principal component. (Less)
Please use this url to cite or link to this publication:
author
Ziemer, Julian LU and Arttu, Lappalainen
supervisor
organization
course
NEKN02 20231
year
type
H1 - Master's Degree (One Year)
subject
keywords
Size Premium, Investor Sentiment, Return Predictability, Behavioral Finance
language
English
id
9124496
date added to LUP
2023-11-24 08:58:08
date last changed
2023-11-24 08:58:08
@misc{9124496,
  abstract     = {{Research on the determinants of the size premium, i.e. that small stocks on average outperform
large stocks, has traditionally focused on financial and macroeconomic factors. However,
recent academic studies shed light on the influence of behavioral factors on the size premium,
specifically investor sentiment. In line with this research, our study analyzes the influence of
investor sentiment measures on the next periods’ European size premium. To comprehensively
capture the variation of the utilized sentiment measures, we further conduct a principal
component analysis. Coinciding with behavioral models, we identify that the size premium
rises following optimism and declines following pessimism among investors. Our analysis
reveals that market-based sentiment measures such as the VSTOXX exhibit highest efficacy in
predicting the European size premium, while survey-based measures exhibit low predicting
power. The most effective results in predicting the size premium, we obtain through the
implementation of a market-based principal component.}},
  author       = {{Ziemer, Julian and Arttu, Lappalainen}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Can investor sentiment predict the European size premium? An empirical investigation of regional size premium predictability}},
  year         = {{2023}},
}