Risk appetite and (mis)pricing
Abstract
This paper reexamines the beta-return relation through the lens of time-varying risk aversion. We show that the security market line (SML) depends critically on the level of aggregate risk aversion. During periods of high risk aversion, the SML exhibits a positive slope and an intercept that is statistically indistinguishable from zero, with investor sentiment playing only a minor role. During periods of low risk aversion, the SML slope becomes negative and the intercept is significantly positive. Investor sentiment affects the SML only when risk aversion is low. These patterns are robust across alternative portfolio constructions, longer investment horizons, and multiple measures of risk aversion.
Fields of Study & Subjects
Financial Markets and Investment Strategies
Financial Risk and Volatility Modeling
Corporate Finance and Governance
Publication details
- Journal / source
- Journal of Banking & Finance
- Publisher
- Elsevier BV
- Volume
- 186
- Pages
- 107657–107657
- Publication date
- 14 February 2026
- Language
- EN