Sentiment‐scaled CAPM and market mispricing. (17th March 2021)

• Record Type: Journal Article
• Authors: Doukas, John A.; Han, Xiao
• Is Part Of: European financial management. Volume 27:Number 2(2021)
• Page Start: 208
• Page End: 243
• Publication Date: 2021-03-17
• Subjects: conditional CAPM -- market anomalies -- security market line -- state beta -- stochastic discount factor -- time‐varying risk premium -- value premium; Finance -- European Union countries -- Periodicals; International finance -- Periodicals; Corporations -- European Union countries -- Finance -- Periodicals; 332.094
• DOI: 10.1111/eufm.12306
• Languages: English
• ISSNs: 1354-7798

Abstract

Abstract: 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.