Bubbles and Multiple-Factor Asset Pricing Models
18 Pages Posted: 5 Aug 2015 Last revised: 13 Nov 2015
Date Written: November 12, 2015
This paper derives a multiple-factor asset pricing model with asset price bubbles in an arbitrage-free, competitive, and frictionless market. As such it generalizes existing asset pricing models, all of which implicitly assume asset price bubbles do not exist. This generalization leads to two new empirical implications. The first is that positive alphas can exist in an arbitrage-free market due to the existence of asset price bubbles. These positive alphas do not represent abnormal profit opportunities. The second is that bubble risk factors can exist with positive risk premiums. The testing of these new empirical implications awaits subsequent research.
Keywords: beta model, multiple-factor model, price bubbles, arbitrage pricing, stock alpha
JEL Classification: G11, G12
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