Three essays on asset pricing and behavioral finance

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Zhang, Qi
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This thesis includes three essays. The first essay examines the pricing of sentiment commonality in the cross-section. First, we propose a novel option-implied firm-level investor sentiment measure—the open interest weighted implied volatility ratio of out-of-the-money (OTM) calls over OTM puts. A long-short portfolio strategy, based on a long position in the high-sentiment portfolio and a short position in the low-sentiment portfolio, generates a significant abnormal return of 8.73% per annum. This sentiment effect on stock returns is more pronounced for hard-to-value stocks, which are small, young, highly volatile, and less liquid. Next, we validate the existence of sentiment commonality at the market and industry levels. The quintile portfolio with the highest sentiment commonality outperforms the portfolio with the lowest sentiment commonality. We find a positive and significant risk premium on the sentiment commonality risk. In the second essay, a secondary data study and a controlled experiment reveal the gender bias that exists in the relationship between CEO tweets and investor risk perceptions. We construct a unique measure of CEO Twitter professional disclosure using the cosine similarity between key words in tweets and key words in earnings call transcripts. We find that a higher level of professional disclosure via CEO social media accounts reduces daily implied volatility, a measure of market risk perception. This association is more pronounced for attractive female CEOs than for male CEOs or less attractive female CEOs. The controlled experiment also validates that more attractive female CEOs are rewarded when posting more professional tweets on social media, which reduces investors’ (subjects’) risk perceptions. In the third essay, we use a large sample of individual Chinese investors to demonstrate that they are more likely to trade stocks for short-term speculation after experiencing trauma such as natural disasters, serious illness, or death in their immediate family. Investors exhibited higher impulsivity, a greater desire for immediate gratification, a greater willingness to follow trends, and more risk-taking behaviors as a result of a trauma experience. We also find that the relationship between trauma experience and investment horizon is less pronounced for older and married individuals.
Asset Pricing, Behavioral Finance, Trauma, Sentiment, Risk Perception