Is CAPM a Behavioral Model? Estimating Sentiments from Rationalism

Abstract

The authors investigate the role of investor sentiment in asset pricing. In particular, they explore whether this investor sentiment has the ability to be predicted by the residuals from the capital asset pricing model (CAPM). The analysis makes use of data for S&P500 firms on a daily basis, spanning the period of 1995–2015, as well as certain panel methodological approaches. The results suggest that the residuals from the CAPM model gain explanatory power for investor sentiment. In other words, investor sentiment is a priced factor. The implication of this finding is that overlooking the role of investor sentiment in classical finance theory could lead to an imperfect picture of describing the asset pricing.