CAPM with Sentiment: Market Anomalies through Sentiment

Finance theory asserts that stock prices refects their fundamental value. When the price changes, rational arbitrageurs absorb these shocks and there-fore stock price stays at the fundamental level. Sometimes for some types of stock, noise traders could be an infuence on the stock price. We could define investor sentiment as the inclination to speculate, so when sentiment is high, investor demand for speculative investment is high, conversely when is low, investor demand for speculative investments is low. It is correct to assert that some stocks are more sensitive to speculative demand and those which are more difficult to value, tend to be the riskiest to arbitrage. In our research we try to demonstrate the relationship between large and small caps returns in the Italian Stock Index, as quoted in Italian Stock Exchange and consumer indexes. In fact economic optimism promotes consumer confidence and a willingness to make large expenditures and debt commitments, while economic uncertainty breeds pessimism and a desire to curtail expenditures and rebuild financial reserves. We use the ISAE Consumer and Business Survey as a consumer index.