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The signature of sentiment in conditional consumption CAPM estimates: A note

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  • Potì, Valerio
  • Shefrin, Hersh

Abstract

In this paper, we show that augmenting the consumption CAPM with sentiment, and thus allowing for systematic investor error in forming beliefs, helps reconcile investors’ optimizing behaviour with the cross-section of average stock returns. The fit of specifications that do not include sentiment-related factors, instead, crucially hinges on parameters estimates that are inconsistent with standard risk aversion assumptions, as formulated for example by Kimball (1993). This implies that investors must either commit systematic errors, at least ex-post, in assessing the joint distribution of stock returns and aggregate consumption or they must behave in a way that, at the aggregate level, is inconsistent with expected utility maximization under Kimball’s (1993) standard risk aversion.

Suggested Citation

  • Potì, Valerio & Shefrin, Hersh, 2014. "The signature of sentiment in conditional consumption CAPM estimates: A note," Journal of Behavioral and Experimental Finance, Elsevier, vol. 2(C), pages 1-9.
    • Handle: RePEc:eee:beexfi:v:2:y:2014:i:c:p:1-9
    DOI: 10.1016/j.jbef.2014.02.004
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    Cited by:

    1. Breitmayer, Bastian & Pelster, Matthias, 2018. "Affect and stock returns," Journal of Behavioral and Experimental Finance, Elsevier, vol. 18(C), pages 76-84.

    More about this item

    Keywords

    Asset pricing; Coskewness; Linear pricing; Maximal sharpe ratios;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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