Sentiment-Augmented Asset Pricing in Bursa Malaysia: A Time-Varying Markov Regime-Switching Model

  • Han Hwa Goh Multimedia University
  • Lee Lee Chong Multimedia University
  • Ming Ming Lai Multimedia University

Abstract

This paper examines the nonlinear effects of investor sentiment on asset pricing in Bursa Malaysia. The Fama and French three-factor model is re-augmented within a time-varying Markov regime-switching framework to investigate the three risk premiums, conditioned by four different proxies for investor sentiment (i.e. market-wide indicators). The study finds evidence that the stock returns movement of Bursa Malaysia exhibits a nonlinear two regimes pattern. Besides, changes in the investor sentiment to some extent function as a mediator in the regime switching dynamics between bear and bull market cycles in Malaysian stock returns. It is also found that an increase in positive sentiment of investors leads to a higher transition probability of regime switching during bear markets. In addition, the three risk premiums are time-variant, contingent upon the fluctuation of the proxies for investor sentiment within discrete regimes. The study finds that in general, the market premium falls when the stock market switches from bull to bear markets. On the contrary, both the size and value premiums increase when the stock market moves from bull to bear markets.

Author Biographies

Han Hwa Goh, Multimedia University

Faculty of Management, Multimedia University

Lee Lee Chong, Multimedia University

Faculty of Management, Multimedia University

Ming Ming Lai, Multimedia University

Faculty of Management, Multimedia University

Published
2018-11-09
How to Cite
GOH, Han Hwa; CHONG, Lee Lee; LAI, Ming Ming. Sentiment-Augmented Asset Pricing in Bursa Malaysia: A Time-Varying Markov Regime-Switching Model. Malaysian Journal of Economic Studies, [S.l.], v. 55, n. 2, p. 285-300, nov. 2018. ISSN 1511-4554. Available at: <http://mjes.um.edu.my/index.php/MJES/article/view/14569>. Date accessed: 13 dec. 2018.
Section
Articles