European Financial Management
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 βs and portfolios with higher state βs earn higher returns.
Original Publication Citation
Doukas, J. A., & Han, X. (2021). Sentiment-scaled CAPM and market mispricing. European Financial Management, 27(2), 208-243. https://doi.org/10.1111/eufm.12306
Doukas, John A. and Han, Xiao, "Sentiment-Scaled CAPM and Market Mispricing" (2021). Finance Faculty Publications. 33.