Can investor sentiment predict the European size premium? An empirical investigation of regional size premium predictability
(2023) NEKN02 20231Department 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:
http://lup.lub.lu.se/student-papers/record/9124496
- author
- Ziemer, Julian LU and Arttu, Lappalainen
- supervisor
- organization
- course
- NEKN02 20231
- year
- 2023
- 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}}, }