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When the cost of hedging is nil, the conditional capital asset pricing model (CAPM) holds. We empirically test the conditional CAPM by regressing asset returns onto the product of their conditional betas and market returns. Estima...
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When the cost of hedging is nil, the conditional capital asset pricing model (CAPM) holds. We empirically test the conditional CAPM by regressing asset returns onto the product of their conditional betas and market returns. Estimated intercepts are not statistically different from zero, implying that the conditional CAPM successfully explains the conditional level of asset returns. Yet, unconditional betas do not explain the cross section of average asset returns; the unconditional CAPM fails. We show why and how the success of the conditional CAPM actually explains the failure of the unconditional CAPM, thereby rationalizing the coexistence of these two intriguing results.
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Purpose This study aims to provide a comprehensive overview of asset pricing research and identifies the general research trends in the area. The study also aims to provide future direction to the researchers in the area of asset ...
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Purpose This study aims to provide a comprehensive overview of asset pricing research and identifies the general research trends in the area. The study also aims to provide future direction to the researchers in the area of asset pricing.Design/methodology/approach The study uses bibliometric analysis techniques to achieve the stated purpose. The study covers 3,007 articles published in the top 50 finance and economics journals, accessed from the Scopus database for a period of 47 years (1973–2020). After initial searching for “asset pricing” as the main keyword in “title, abstract, keywords”, the database yields 6,583 articles. This number further reduces to 3,007 articles when the search is restricted to research and review articles published in the top 50 peer-reviewed journals.Findings The tabular and pictorial representation obtained from the analysis exhibit that asset pricing is an extensively researched area; however, a sudden rise in the number of publications (242) observed for 2019 demonstrates a growing interest amongst researchers. Further, affiliation statistics indicate that the volume of research is mainly concentrated in the USA and other developed nations; hence it opens vistas for the exploration of risk-return dynamics in the context of emerging markets.Originality/value The work presents an exhaustive and comprehensive review along with potential research implications. The present study reconciles various contradictory views of the prior studies under asset pricing such as risk-return trade-off, low-risk anomaly and provides the researchers with potential research gaps.
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This note identifies and fixes a minor gap in Proposition 1 in Barberis and Huang (Am Econ Rev 98(5):2066-2100, 2008). Assuming homogeneous cumulative prospect theory decision makers, we show that CAPM is a necessary (though not s...
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This note identifies and fixes a minor gap in Proposition 1 in Barberis and Huang (Am Econ Rev 98(5):2066-2100, 2008). Assuming homogeneous cumulative prospect theory decision makers, we show that CAPM is a necessary (though not sufficient) condition that must hold in equilibrium. We support our results with numerical examples where security prices become negative.
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We use securities listed on 13 European equity markets to form size and momentum portfolios. We find limited evidence of a size premium but significant momentum returns in eight sample markets. We find that these premia may not co...
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We use securities listed on 13 European equity markets to form size and momentum portfolios. We find limited evidence of a size premium but significant momentum returns in eight sample markets. We find that these premia may not constitute an anomaly because they are consistent with a varying-beta Capital Asset Pricing Model. We also show that systematic risk is related to the business cycle. Furthermore, the results suggest that although size and especially momentum returns are significant, it would be difficult to exploit them in the short to medium run, because they are positive and sizeable in very few years in our sample.
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This paper develops a behavioural asset pricing model in which traders are not fully rational as is commonly assumed in the literature. The model derived is underpinned by the notion that agents' preferences are affected by their ...
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This paper develops a behavioural asset pricing model in which traders are not fully rational as is commonly assumed in the literature. The model derived is underpinned by the notion that agents' preferences are affected by their degree of optimism or pessimism regarding future market states. It is characterized by a representation consistent with the Capital Asset Pricing Model, augmented by a behavioural bias that yields a simple and intuitive economic explanation of the abnormal returns typically left unexplained by benchmark models. The results we provide show how the factor introduced is able to absorb the "abnormal" returns that are not captured by the traditional CAPM, thereby reducing the pricing errors in the asset pricing model to statistical insignificance.
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Assuming a utility function, which is non-separable in money and consumption, we derive a simple, non-linear asset pricing model, according to which investors' willingness to hold liquid assets in their portfolio can be described ...
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Assuming a utility function, which is non-separable in money and consumption, we derive a simple, non-linear asset pricing model, according to which investors' willingness to hold liquid assets in their portfolio can be described by a sort of habit format
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Purpose - The purpose of this paper is to assess how much difference it makes for US firms to use the two-factor ICAPM to estimate their cost of equity instead of a single-factor CAPM. Design/methodology/approach - For a large sam...
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Purpose - The purpose of this paper is to assess how much difference it makes for US firms to use the two-factor ICAPM to estimate their cost of equity instead of a single-factor CAPM. Design/methodology/approach - For a large sample of US companies, the authors compare the empirical cost of equity estimates of a two-factor international CAPM with those of the single-factor domestic CAPM and the single-factor global CAPM. Findings - The authors find that the cost of equity estimates of the two-factor ICAPM are reasonably close to those of either single-factor model for US firms with low-to-moderate foreign exchange exposure; and second, perhaps surprisingly, for US firms with extreme foreign exchange exposure, that the cost of equity estimates of the two-factor ICAPM tend to be very close to those of the domestic CAPM, and even closer than to those of the single-factor global CAPM. Research limitations/implications - The paper's findings might prove useful to academic researchers wanting to resolve the seemingly contradictory empirical results on the pricing of FX risk. Practical implications - The findings will hopefully help managers decide whether they should go to the trouble of estimating a US firm's cost of equity with the two-factor international CAPM instead of a traditional single-factor CAPM. Originality/value - The paper extends the existing literature by focusing on the two-factor ICAPM, and finds some new and surprising empirical results.
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Evaluating competing multifactor asset pricing models involves comparing the statistical significance of their mean pricing errors (alphas). Unfortunately, this comparison favors imprecisely estimated models because p-values tend ...
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Evaluating competing multifactor asset pricing models involves comparing the statistical significance of their mean pricing errors (alphas). Unfortunately, this comparison favors imprecisely estimated models because p-values tend to be higher in more noisy models. To avoid false impressions of relative success at tests for zero mean pricing errors, we develop a notion of comparative p-values and suggest comparing these instead of the raw p-values. This comparison gives more precisely estimated models a fairer chance or, equivalently, quantifies how much easier it is for imprecisely estimated models, by comparison, to pass the test. (C) 2015 Elsevier B.V. All rights reserved.
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We consider a single-period financial market model with normally distributed returns and heterogeneous agents. Specifically, some investors are classical expected utility maximizers whereas some others follow cumulative prospect t...
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We consider a single-period financial market model with normally distributed returns and heterogeneous agents. Specifically, some investors are classical expected utility maximizers whereas some others follow cumulative prospect theory. Using well-known functional forms for the preferences, we analytically prove that a Security Market Line Theorem holds. This implies that capital asset pricing model is a necessary (though not sufficient) requirement in equilibria with positive prices. We prove that equilibria may not exist and we give explicit sufficient conditions for an equilibrium to exist. To circumvent the complexity arising from the interaction of heterogeneous agents, we propose a segmented-market equilibrium model where segmentation is endogenously determined.
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