The Lost Capital Asset Pricing Model
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BORIS DOI
Publisher DOI
Description
We provide a novel explanation for the empirical failure of the CAPM despite its
widespread practical use. In a rational-expectations economy in which information is
dispersed, variation in expected returns over time and across investors creates an informational gap between investors and the empiricist. The CAPM holds for investors,
but the Securities Market Line appears flat to the empiricist. Variation in expected
returns across investors accounts for the larger part of this distortion, which is empirically substantial; it offers a new interpretation of why “Betting Against Beta” works:
BAB really bets on true beta. The empiricist retrieves a stronger CAPM on days when
public information reduces disagreement among investors.
widespread practical use. In a rational-expectations economy in which information is
dispersed, variation in expected returns over time and across investors creates an informational gap between investors and the empiricist. The CAPM holds for investors,
but the Securities Market Line appears flat to the empiricist. Variation in expected
returns across investors accounts for the larger part of this distortion, which is empirically substantial; it offers a new interpretation of why “Betting Against Beta” works:
BAB really bets on true beta. The empiricist retrieves a stronger CAPM on days when
public information reduces disagreement among investors.
Date of Publication
2023-03-14
Publication Type
Article
Subject(s)
Language(s)
en
Contributor(s)
Andrei, Daniel | |
Wilson, Mungo |
Additional Credits
Series
Review of Economic Studies
Publisher
Oxford University Press
ISSN
0034-6527
Access(Rights)
open.access