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Analysis of the Role of Investor Sentiment on Expected Returns Under CAPM Model Based on Behavioral Finance Perspective

In: Proceedings of the 2025 3rd International Academic Conference on Management Innovation and Economic Development (MIED 2025)

Author

Listed:
  • Hangyu Liu

    (Southwestern University of Finance and Economics, School of Finance, Institute of Chinese Financial Studies)

Abstract

In the financial market, the impact of investor sentiment on investment decisions is crucial and challenges the assumptions of classical financial theories. From the perspective of behavioral finance, this study constructs an investor sentiment indicator using monthly data of the Chinese A-share market from 2010 - 2023 as a sample and empirically analyzes it using a multiple linear regression model. Based on the CAPM model, this study further introduces control variables and interaction terms to explore the mechanism of investor sentiment on asset pricing. The empirical results show that irrational behavior triggered by investor sentiment interferes with asset pricing, and investor sentiment is significantly negatively related to expected return. Split-sample analysis further reveals that stock prices of small-capitalization firms are more significantly affected by sentiment, but large-capitalization firms will face a stronger negative impact. In addition, the negative effect of investor sentiment on expected returns is more pronounced in the case of lower institutional ownership, which may also be related to the difference in the stability of different market players under sentiment shocks.

Suggested Citation

  • Hangyu Liu, 2025. "Analysis of the Role of Investor Sentiment on Expected Returns Under CAPM Model Based on Behavioral Finance Perspective," Advances in Economics, Business and Management Research, in: Barbara Siuta-Tokarska & Adriana Grigorescu & Md. Mamun Habib & Yifeng Zhu (ed.), Proceedings of the 2025 3rd International Academic Conference on Management Innovation and Economic Development (MIED 2025), pages 144-156, Springer.
    • Handle: RePEc:spr:advbcp:978-94-6463-835-6_17
    DOI: 10.2991/978-94-6463-835-6_17
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