Testing the Sentiment-Scaled CAPM Model in China: Evidence from the Shanghai Stock Exchange

Abstract

Purpose The purpose of this study is to use investor sentiment as a conditional variable in the Capital Asset Pricing Model (CAPM) and test the validity of this sentiment-scaled CAPM by conducting cross-sectional return tests on Shanghai Stock Exchange. Data For all the stocks listed on the Shanghai Stock Exchange (A shares) for the period of July 2001 to July 2020, monthly transaction and valuation data was obtained from the CSMAR database. Methodology Fama-Macbeth cross-sectional tests on CAPM, Fama-French three-factor model and sentiment-scaled CAPM using the 25 size and book-to-market ratio sorted portfolio returns. The factors and portfolios are constructed according to the steps in Fama and French (1993) with python. Findings Results reveal that investor sentiment as a conditional variable contains significant information for explaining the cross-section of stock returns. The coefficient estimates and adjusted R2 are slightly different from previous studies, which implies the distinction between different stock markets and the need to conduct further research on sentiment scaled asset pricing models in developing stock markets