Economists' Hubris: The Case of Asset Pricing
Ernst & Young LLP
Contango Capital Advisors
September 7, 2009
Journal of Financial Transformation, Vol. 27, pp. 9-13, December 2009
This is the second in a series of articles that examines the practical applications of economic thought. Its focus is on the most fundamental aspects of finance theory, namely asset pricing. We discuss the major pricing models developed during the past 5 decades and critically examine their practical applications. Sadly, the results are not very encouraging. As with other academic economic disciplines, the gap between what is taught about the markets and what actually takes place is quite large, a gap in no way mitigated by the behavioralist arm of the subject. The seminal works of Sharpe and Lintner have provided us with a sound foundation upon which to build realistic pricing models, but unfortunately the unwavering acceptance of these models has resulted in research that merely cements their acceptance, discouraging an examination of how those pricing models could be adapted to suit the practical world.
Number of Pages in PDF File: 5
Keywords: Asset pricing, market efficiency, applied finance, behavioral finance, behavioral economics
JEL Classification: G12, G13, G14, D03
Date posted: September 7, 2009 ; Last revised: October 5, 2009
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