Testing the Effectiveness of the Behavioral Capital Asset Pricing Model in Inefficient Markets “Applied Study on Listed Companies in the Egyptian Stock Exchange”

Abstract

This research examined whether a behavioral capital asset pricing model based on investor sentiment has more explanatory power in explaining stocks returns over other theoretical and empirical asset pricing models. In this at- tempt to test the explanatory power of this newly behavioral asset pricing model. A principal component analysis method was used to construct a sen- timent index based on two underlying proxies, market turnover and volatility premium. This study contributes to the literature as there are no studies ex- amined the behavioral capital asset pricing theory validity in the Egyptian Stock Exchange. This research has two main empirical results. First, the Fama and French three-factor model has little explanatory power within the Egyptian Stock market. Although the size factor is priced within sample stocks average returns, the value factor showed no e ect on stock returns. Second, investor sentiment has a signi cant e ect on stocks average returns. This result support the existence of the noise trader e ect within the Egyp- tian Stock market.