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Are investor sentiments priced by the CAPM?




In this paper, we investigate whether the international version of CAPM can price rational and irrational sentiments of U.S. individual and institutional investor sentiments. The results show that the CAPM prices rational sentiments driven by fundamentals and irrational sentiments not driven by rational risk factors in the case of the U.S. institutional investors. We check our results by additionally estimating a non-equilibrium-based model, such as a fundamental market model, and find similar results. This indicates that irrational sentiments of institutional investors are significantly positively related to returns predicted, as well as those not predicted by the CAPM. We also compare these findings with the response of actual DJIA and S&P 500 returns to individual and institutional investor sentiments and find that CAPM does a partial job by capturing only institutional investor sentiments. These results are consistent with the view that the studies that use an equilibrium-based asset-pricing model such as CAPM need to factor in institutional investors’ cognitive factors to better capture the return generating processes.

Suggested Citation

  • Verma, Rahul & Soydemir, Gökçe, 2012. "Are investor sentiments priced by the CAPM?," Journal of Financial Transformation, Capco Institute, vol. 35, pages 57-70.
  • Handle: RePEc:ris:jofitr:1528

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    More about this item


    investor sentiment; CAPM; asset pricing; asset pricing model;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage


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