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An Empirical Study of the Sentiment Capital Asset Pricing Model

Author

Listed:
  • Soroush Ghazi

    (Culverhouse College of Business, University of Alabama)

  • Mark Schneider

    (Culberhouse College of Business, University of Alabama and Economic Science Institute, Chapman University)

Abstract

What is market sentiment? This paper takes a new approach to this question and derives a formula for market sentiment as a function of the risk-free rate, the price/dividend ratio, and the conditional stock market volatility. The formula is derived from a representative agent with a prospect theory probability weighting function. We estimate the model and nd that our sentiment measure correlates positively with the leading sentiment indexes. The model matches the equity premium while generating a low and stable risk-free rate with low risk aversion. We also apply the model to explain other anomalies for the aggregate stock market.

Suggested Citation

  • Soroush Ghazi & Mark Schneider, 2020. "An Empirical Study of the Sentiment Capital Asset Pricing Model," Working Papers 20-08, Chapman University, Economic Science Institute.
    • Handle: RePEc:chu:wpaper:20-08
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    File URL: https://digitalcommons.chapman.edu/esi_working_papers/302/
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    More about this item

    Keywords

    Sentiment; Prospect Theory; Equity Premium Puzzle; Pricing Kernel Puzzle; Sentiment Indexes;
    All these keywords.

    JEL classification:

    • G40 - Financial Economics - - Behavioral Finance - - - General
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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