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Student
Title
Supervisor
Faculty
Educational Programme
Final Grade
Year of Graduation
Ivan Vereshchagin
Bond Risk Premia and Global Investor Sentiment Factor
Financial Economics
(Master’s programme)
9
2016
In our research we focused on investor sentiment factor. The main contribution of our work is studying influence and predicting power of investor sentiment factor on the bond market with the information spanned not only by the term structure and global factors.

In our analysis we tested one fundamental hypothesis, which can be viewed from several perspectives:

- Negative influence of increasing sentiment on bond excess returns, which represents the measure of investor’s incentive to hedge against bad state of economy

- Positive influence of increasing sentiment on bond excess returns, which represents the slope of term structure (long term-spot rate differential)

- Assuming first two perspectives, overall negative influence of increasing investor sentiment on bond excess returns, with higher negative influence on short-term bonds compared to long-term ones

We used the best available data on YTMs of US, Canada, UK, Germany, Switzerland and Australia with monthly observations ranging from 1965 to 2010.

To perform analysis we use model which originally was created by Cochrane & Piazessi (2005) and Dahlquist & Hasseltoft (2013) and introduce an investor sentiment factor developed by Baker & Wrungler (2006).

Moreover, we confirm evidence of bond excess return predictability of Cochrane & Piazessi (2005) factor for all countries and Dahlquist & Hasseltoft (2013) factor for all countries, despite Australia.

We report significance of sentiment factor on US, Switzerland, UK, Canada, Germany.

We confirm out hypothesis by finding evidence of overall decrease of bonds excess returns and lower excess returns on short-term bonds compared with long-term bonds for Germany, UK, Canada and US during high periods of investor sentiment.

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