Value premium, sentiment and uncertainty in Latin America: reason or emotion?

Purpose This article aims to analyze whether local investor sentiment is causing mispricing in value premium in emerging Latin American countries and whether uncertainty mitigates this effect. Design/methodology/approach We analyzed 428 non-financial publicly traded firms in Argentina, Brazil, Chile and Mexico, accumulating 1,067,930 daily observations. To measure investor sentiment, we utilized both market and firm-level indexes. In addition, we incorporated the Economic Policy Uncertainty (EPU), World Uncertainty Index (WUI), Chicago Board Options Exchange (CBOE) Volatility (VIX) and Google Trends® to represent uncertainty. We regressed high minus low (HML) on market sentiment and uncertainty, and we employed a six-factor model with the risk factor based on firm-specific investor sentiment, competing with HML. Findings The main results show that HML yields positive returns in most countries studied. Surprisingly, market sentiment does not affect HML as expected; instead, uncertainty emerges as a more influential factor, reducing HML’s return. Factor sentiment contributes to asset pricing in countries with favorable political-economic conditions. The negative impact of uncertainty and external sentiment suggests that reason prevails over emotion in these markets, suggesting that investors are more rational than expected. Originality/value We contribute to the literature by examining the political-economic situation and market sentiment proxies, incorporating low-cost uncertainty and rapid information response through news channels (EPU/WUI) and the Internet (TRENDS). Additionally, we expand asset pricing literature by identifying a new risk factor in emerging Latin American countries. Our main contribution is evaluating the viability of investing in the value premium, a widely adopted strategy covered by the media.