Capital Asset Pricing Model Based On Investor Sentiment

Asset pricing theory describes how assets' price is decided,and its purpose is to help investors to assess and decide the value of all kinds of securities,which can help them to make appropriate investment decisions.Asset pricing theory can be divided into rational asset pricing theory and behavioral asset pricing theory on the basis that market participants are rational or irrational.Studying the capital asset pricing model based on the sentiment not only can promote the development of behavioral finance theory,and has important significance for perfecting the capital market pricing system.In the paper,we studied the correlation between sentiment and stock index returns,and constructed the asset pricing model based on the investors' sentiment.Firstly,the empirical research shows that market sentiment is the same frequency returns,positive factor,and the influence of sentiment on stock returns decreases over time.Then,we can relax the assumption that investors are rational in traditional capital asset pricing model,and build asset pricing model with sentiment and carries,the results show that investors' sentiment can change their portfolio choice,which can deviate from the rational situation.Finally,the model was extended to the continuous situation,and found that the optimal portfolio proportion only depends on the probability distribution of single period's earnings and not others,which explained the"short-sighted" phenomenon in the market.In a word,the empirical results and theoretical exploration both show that investor sentiment has an important impact on asset prices,so adding investor sentiment to the capital asset pricing model helps to understand the behavior of asset price.