Animal Spirit Beta

Do some stocks entail emotional relationships that alter investor perceptions of risk and return? Is the effect exploitable? In their November 2024 paper entitled “Investor Emotions and Asset Prices”, Shehub Bin Hasan, Alok Kumar and Richard Taffler develop and test a measure of the emotional state of the market and assess its implications for individual stocks. Specifically, they each month:

1. Use a bag-of-words approach encompassing 295 emotion words to construct a market-level emotion index as the ratio of emotion words to total number of words in newspaper articles about the S&P 500 Index.
2. Estimate for each stock an emotion beta by regressing monthly excess returns versus the market emotion index over the last 60 months.
3. Sort stocks into tenths (deciles) based on last-month emotion beta and compute monthly value-weighted returns of the decile portfolios.

Using 65,825 news articles about the S&P 500 Index from 21 national and local newspapers, monthly returns and firm/stock characteristics for a listed U.S. stocks and monthly returns for various stock factors during January 1990 through September 2022, they find that:

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