Anchoring Adjusted Capital Asset Pricing Model
Journal of Behavioral Finance, Forthcoming
43 Pages Posted: 6 Nov 2015 Last revised: 1 Jul 2017
Date Written: June 1, 2016
What happens when the capital asset pricing model (CAPM) is adjusted for the anchoring and adjustment heuristic of Tversky and Kahneman (1974)? The surprising finding is that adjusting CAPM for anchoring provides a plausible unified framework for understanding almost all of the key asset pricing anomalies. The anomalies potentially captured in the theoretical framework include the well-known size, and value effects, high-alpha-of-low-beta-stocks, accruals, low volatility, momentum effect, stock-splits, and reverse stock-splits. The equity premium is also larger with anchoring. This suggest that the anchoring adjusted capital asset pricing model (ACAPM) may provide the needed unifying structure to behavioral finance.
Keywords: Size Premium, Value Premium, Behavioral Finance, Stock Splits, Equity Premium Puzzle, Anchoring and Adjustment Heuristic, CAPM, Asset Pricing, Accrual Anomaly, Low Volatility Anomaly, Low-beta-high-alpha, Momentum Effect
JEL Classification: G12, G11, G02
Suggested Citation: Suggested Citation