X-Capm: An Extrapolative Capital Asset Pricing Model

62 Pages Posted: 29 Jun 2013 Last revised: 10 Jul 2013

See all articles by Nicholas Barberis

Nicholas Barberis

Yale School of Management; National Bureau of Economic Research (NBER)

Robin M. Greenwood

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Lawrence J. Jin

California Institute of Technology

Andrei Shleifer

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Date Written: June 2013

Abstract

Survey evidence suggests that many investors form beliefs about future stock market returns by extrapolating past returns: they expect the stock market to perform well (poorly) in the near future if it performed well (poorly) in the recent past. Such beliefs are hard to reconcile with existing models of the aggregate stock market. We study a consumption-based asset pricing model in which some investors form beliefs about future price changes in the stock market by extrapolating past price changes, while other investors hold fully rational beliefs. We find that the model captures many features of actual prices and returns, but is also consistent with the survey evidence on investor expectations. This suggests that the survey evidence does not need to be seen as an inconvenient obstacle to understanding the stock market; on the contrary, it is consistent with the facts about prices and returns, and may be the key to understanding them.

Suggested Citation

Barberis, Nicholas and Greenwood, Robin M. and Jin, Lawrence J. and Shleifer, Andrei, X-Capm: An Extrapolative Capital Asset Pricing Model (June 2013). NBER Working Paper No. w19189. Available at SSRN: https://ssrn.com/abstract=2287047

Nicholas Barberis (Contact Author)

Yale School of Management ( email )

135 Prospect Street
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National Bureau of Economic Research (NBER)

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Robin M. Greenwood

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
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National Bureau of Economic Research (NBER)

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Lawrence J. Jin

California Institute of Technology ( email )

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MC 228-77
Pasadena, CA 91125
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HOME PAGE: http://www.hss.caltech.edu/content/lawrence-jin

Andrei Shleifer

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
617-495-5046 (Phone)
617-496-1708 (Fax)

HOME PAGE: http://www.economics.harvard.edu/~ashleife/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

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