Testing the effectiveness of the behavioral capital asset pricing model in inefficient markets: An 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 my attempt to test the explanatory power of this newly behavioral asset pricing model, I use a principle component analysis methodology to construct a sentiment index based on two underlying proxies, market turnover and volatility premium. As far for my Knowledge, this study contributes to the literature as there are no studies examined the behavioral capital asset pricing theory validity within the Egyptian Stock Exchange. This research has two main empirical results. Firstly, Fama and French three factor model has little explanatory power within the Egyptian stock market. Even though size factor is priced within sample stocks average returns, value factor showed no effect on stocks returns. Secondly, Investor sentiment has a significant effect on stocks average returns. This result supports the existing of the noise trader effect within the Egyptian stock market.