An Empirical Study of the Sentiment Capital Asset Pricing Model

Soroush Ghazi () and Mark Schneider ()
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Soroush Ghazi: Culverhouse College of Business, University of Alabama
Mark Schneider: Culberhouse College of Business, University of Alabama and Economic Science Institute, Chapman University

Working Papers from Chapman University, Economic Science Institute

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.

Keywords: Sentiment; Prospect Theory; Equity Premium Puzzle; Pricing Kernel Puzzle; Sentiment Indexes (search for similar items in EconPapers)
JEL-codes: G40 G41 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-fmk and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:chu:wpaper:20-08

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