The Impact of Investor Sentiment on Capital Asset Pricing Model

Abstract

How to explain the changes in stock returns has been the subject of research by experts and investors for a long time And because there are about 60% of composition of Taiwan ’s stock market are individual investors indicating that the price of stock may be particularly affected by the emotion of market participants We argue that noise trading will be more prevalent and impactful in optimistic periods the expected return difference between high- and low-beta stocks is negative; While during pessimistic periods a standard CAPM obtains beta is positively priced In this paper we used listed companies of Taiwan as research data and the samples covers the period 2001-2018 In portfolio test we sorted portfolio by beta and then separate the periods by optimistic neutral and pessimistic The results show that in pessimistic periods the average monthly return of portfolios increase with beta as predicted by the CAPM In optimistic periods the expected return difference between high- and low-beta stocks is negative and produces a p-value smaller than 1% In Fama and Macbeth regression analysis the results are in line with previous research Beta is positively priced in pessimistic periods and is negatively priced in optimistic periods Through the regression results we also find that Taiwan stock market have significant momentum effect no matter in any emotion periods but didn’t have size effect and value effect

Date of Award	2020
Original language	English
Supervisor	Tse-Shih Wang (Supervisor)