We distill sentiment from a huge assortment of NASDAQ news articles by means of machine learning methods and examine its predictive power in single-stock option markets and equity markets. We provide evidence that single-stock options react to contemporaneous sentiment. Next, examining return...

Although Capital Asset Pricing Model is very convenient for estimating the Cost of Capital for long-term investments, it requires the determination and use of a value for the equity risk premium (ERP). Using Prospect Theory introduced by Kahneman and Tversky and assuming a Brownian motion for...

We propose a measure of investors' climate sentiment by performing sentiment analysis on StockTwits posts on climate change and global warming. We find that when investors' climate sentiment is high, emission stocks are relatively overpriced. Moreover, we show that an increase in carbon prices...

We examine how extreme market risks are priced in the cross-section of asset returns at various horizons. Based on the decomposition of covariance between indicator functions capturing fluctuations of different parts of return distributions over various frequencies, we define a \textit{quantile...

Risk-adjusted momentum returns are usually estimated by constructing momentum portfolios and then running a full-sample regression of their returns on a set of factors (portfolio-level risk adjustment). This approach implicitly assumes constant factor exposure of the momentum portfolio. However,...

Experts’ opinions are widely considered for investment decisions. We collect textual information from cryptocurrency experts, study the dynamics in their discussion topics and their sentiment in relation to market movements. Based on the analysis we test various hypothesis which span if the...

Maximum likelihood estimation of discretely observed diffusion processes is mostly hampered by the lack of a closed form solution of the transient density. It has recently been argued that a most generic remedy to this problem is the numerical solution of the pertinent Fokker-Planck (FP) or...

Investor sentiment indicates how far an asset value deviates from its economic fundamentals. In this paper, we review various measures of investor sentiment based on market, survey, and text and media data, respectively. There is ample evidence that sentiment can explain returns on stocks that...

We reveal a novel channel through which market participants' sentiment influences how they forecast stock returns: their optimism (pessimism) affects the weights they assign to fundamentals. Our analysis yields four main findings. First, if good (bad) “news” about dividends and interest...

In this paper we address three main objections of behavioral finance to the theory of rational finance, considered as “anomalies” the theory of rational finance cannot explain: (i) Predictability of asset returns; (ii) The Equity Premium; (iii) The Volatility Puzzle. We offer resolutions of...