Authors: Paraskevi Boufounou, Antonios Pentsas

Title: Interaction between Risk Premium and Fear of Investors, Fama-French Factors and Cahart Factor during Dot-Com and Sub-Prime Crises : Statistical Evidence

Abstract

This paper analyses the interaction amongst a) the "fear of investors", b) the two factors of Fama&French (1993) and c) the momentum factor (Carhart, 1997) and the risk premium, during the last two recessions ( the “Dot-Com” and the “Sub-Prime”).

The main findings are summarized as follows:

• fear changes are, on average, negative in all sub-periods
• none of the premiums remain consistently positive over time
• after each crisis the relations between our endogenous variables changed dramatically, and, in most cases completely ceased to exist
• the investors’ fear the first day of the week (Monday) is systematically higher, on average, in all sub-periods
• from the Dot-Com crisis and on, the interaction effects between endogenous variables and their relationships break and do not seem to appear again to such an extent
• fear does not cause changes or other effects on the premium or on momentum; seventh, following the Sub-Prime crisis, the explanatory power of our VAR models practically nullified. Although fear does not seem to cause reactions in any of the premium, or at the momentum, we found that the existing results and conclusions of the existing literature, are sensitive to model specification.
• the results of the impulse responses show that the various shock of endogenous variables have a statistically significant effect on other one and last, for most of them, for over 4 days.