Expectile CAPM

Wei Hu and Zhenlong Zheng

Economic Modelling, 2020, vol. 88, issue C, 386-397

Abstract: Conventional wisdom suggests that the uncertainty of uninformed noise-traders’ sentiment deters rational traders’ arbitrage activities. However, nowadays, social media have made the public sentiment highly predictable, whereas the CAPM-motivated beta-return relation still does not hold in practice. This study advances an argument that the sentiment can also be brought about by rational, sophisticated investors’ use of psychological insight; resultantly, the arbitrage activities are demotivated by their own sentiment, rather than deterred by noise-traders’ sentiment risk. The proposed expectile CAPM provides a parsimonious way to account for this claim, and leads to a sentiment-based functional form of pricing kernel.

Keywords: CAPM; Expectile; Sentiment; Portfolio optimization; Pricing kernel; Momentum (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:88:y:2020:i:c:p:386-397

DOI: 10.1016/j.econmod.2019.09.049

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