We propose a continuous-time equilibrium model with a representative agent that is subject to stochastically fluctuating sentiments. Sentiments dynamically respond to past price movements and exhibit jumps, which occur more frequently when sentiments are disconnected from underlying fundamentals. We model feedback effects between asset prices and sentiment in both directions. Our analysis shows that in equilibrium, sentiments affect prices even though they have no direct impact on the asset’s fundamentals. Empirically, the equilibrium risk premia and risk-free rate respond to measurable shifts in sentiment in the direction predicted by the model.