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Sentiment‐scaled CAPM and market mispricing
Author(s) -
Doukas John A.,
Han Xiao
Publication year - 2021
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/eufm.12306
Subject(s) - capital asset pricing model , value premium , market portfolio , portfolio , economics , risk premium , security market line , financial economics , intuition , expected return , econometrics , stock market , paleontology , horse , biology , philosophy , epistemology
This study explores the conditional version of the capital asset pricing model on sentiment to provide a behavioural intuition behind the value premium and market mispricing. We find betas ( β ) and the market risk premium to vary over time across different sentiment indices and portfolios. More importantly, the state β derived from this sentiment‐scaled model provides a behavioural explanation of the value premium and a set of anomalies driven by mispricing. Different from the static β –return relation that gives a flat security market line, we document upward security market lines when plotting portfolio returns against their state β s and portfolios with higher state β s earn higher returns.