Revisiting the ICAPM under the distortion of risk–return tradeoff in short-horizon stock returns |
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Authors: | Surya Chelikani Kiseok Nam Xuewu Wesley Wang |
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Institution: | Department of Finance, School of Business, Quinnipiac University, Hamden, Connecticut, USA |
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Abstract: | We suggest that the distortion of the positive risk–return relation in the ICAPM is a consequence of trading by informed investors to exploit mispricing. We hypothesize and demonstrate that a non-positive (strongly positive) risk–return relation following positive (negative) market returns is attributed to short-selling (purchasing) of overpriced (underpriced) stocks along with optimistic (pessimistic) expectations conditional on good (bad) market news. We verify this asymmetry in the risk–return relation through the indirect risk–return relation conditional on good (bad) market news. We also find that the attenuation (reinforcement) of the positive risk–return relation is more profound in high- (low-) sentiment periods. |
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Keywords: | ICAPM investor sentiment mispricing risk–return relation short-selling |
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