The CAPM: A Case of Elegance is for Tailors?

Abstract

“If you are out to describe the truth, leave elegance to the tailor.” Albert Einstein (Nobel Prize for Physics, 1921)

This article appeared in the Abacus journal as a response to the commentaries on my article “The Capital Asset Pricing Model (CAPM): The History of a Failed Revolutionary Idea in Finance?” that appeared in the same issue of the Abacus journal (Vol. 49, 2013), and which was aimed at highlighting what I perceived as three “pretences” in asset pricing: (1) the “pretence” at the very beginning of the fanfare for the CAPM that claimed that the data supported at least a version (Black’s model) of the model, (2) the present “pretence” that modern asset pricing can somehow be maintained as some kind of extension or refinement of the CAPM, and (3) the “pretence” that these studies are meaningfully relevant to an understanding of actual capital markets.

Keywords: asset pricing, CAPM, Fama and French three factor model

JEL Classification: G12