| Summary: | This paper contrasts traditional asset pricing models with the assumptions of behavioural finance and investigates the asset valuation explanatory power of investor sentiment. Therefore, we extend the Fama-French-4-Factor model by another factor controlling for sentiment. We consider different portfolios segmented by the firm characteristics size, value (book-to-market) and volatility. Even though the revised factor model does not improve the predictive power, our segmentation sheds light on the cross-section of stock return by examining stocks sensitivities to changes in beginning-of-period sentiment. The empirical model confirms our predictions that smaller, more volatile and growth stocks are more affected by sentiment changes.
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