The Stock Market is Just a Game

Abstract:     
The CAPM is a powerful tool to analyse stock markets. Yet, empirical anomalies remain, e.g.: the equity premium or low risk free interest rate puzzle, IPO stock price behavior around unlock dates and high trading volumes. This paper links corporate finance and asset pricing models and derives these anomalies as rational equilibrium behaviour. The main ingredient is the observation that a firm's value is endogenous. It depends on effort decisions of shareholders which are determined by their holdings and therefore ultimately by the stock price. It is argued that merging corporate finance and asset pricing helps to further understand stock markets.

Number of Pages in PDF File: 46

Keywords: Asset Pricing, Corporate Finance, Equity Premium Puzzle, IPO lockup agreement, No Trade Theorems

JEL Classification: G1, G3

working papers series