Sentiment‐scaled CAPM and market mispricing

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.