The strategy uses sentiment differences and Fama-French factors to sort NYSE, AMEX, NASDAQ stocks into sentiment-based portfolios, rebalancing monthly to create a positive-minus-negative equally weighted sentiment factor.
ASSET CLASS: stocks | REGION: United States | FREQUENCY:
Monthly | MARKET: equities | KEYWORD: Social Media
I. STRATEGY IN A NUTSHELL
Trades U.S. stocks (codes 10 & 11) using a social media-based sentiment factor from Refinitiv-MarketPsych. Stocks are sorted by size, value, profitability, investment, and sentiment. The positive-minus-negative sentiment factor is equally weighted and rebalanced monthly.
II. ECONOMIC RATIONALE
Investor sentiment, captured from social media, explains deviations from fundamentals. Incorporating sentiment into the Fama-French five-factor model enhances explanatory power, captures mispriced stocks driven by mood, and operates independently of traditional factors like momentum.
III. SOURCE PAPER
Does Social Media Sentiment Matter in the Pricing of U.S. Stocks? [Click to Open PDF]
Koeppel, Christian, University of St. Gallen
<Abstract>
This paper applies a recently developed social media-based sentiment proxy for the construction of a new risk factor for sentiment-augmented asset pricing models on U.S. equities. Accounting for endogeneity, autocorrelation and heteroskedasticity in a GMM framework, we find that the inclusion of sentiment significantly improves the performance of the five-factor model from Fama and French (2015, 2017) for different industry and style portfolios like size, value, profitability, investment. 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 profitability.
IV. BACKTEST PERFORMANCE
| Annualised Return | 3.7% |
| Volatility | 5.98% |
| Beta | N/A |
| Sharpe Ratio | 0.62 |
| Sortino Ratio | N/A |
| Maximum Drawdown | N/A |
| Win Rate | N/A |
