Resurrecting the Capital Asset Pricing Model

34 Pages Posted: 17 Oct 2016

See all articles by Hammad Siddiqi

Hammad Siddiqi

University of the Sunshine Coast-School of Business

Date Written: October 15, 2015

Abstract

The capital asset pricing model is generally considered incapable of explaining the stock market behavior. I show that this conclusion is premature, and incorporating a pragmatic approach to approximating optimal Bayesian inference in the model resurrects CAPM. The adjusted CAPM internalizes the well-known size, value, and momentum effects, high-alpha-of-low-beta-stocks, accruals, low volatility anomaly, stock-split anomaly, and reverse stock-split anomaly. The market equity premium is also larger with anchoring. Immediate applications of the adjusted CAPM include improved cost of equity calculation, and improved evaluation of managed portfolio performance.

Keywords: Size Effect, Value Effect, Momentum Effect, Low Volatility Anomaly, Informative Starting Points, Anchoring-and-Adjustment Heuristic

JEL Classification: G12, G11, G10, G02

Suggested Citation

Siddiqi, Hammad, Resurrecting the Capital Asset Pricing Model (October 15, 2015). Available at SSRN: https://ssrn.com/abstract=2852934 or http://dx.doi.org/10.2139/ssrn.2852934

Hammad Siddiqi (Contact Author)

University of the Sunshine Coast-School of Business ( email )

Brisbane, QLD 70010
Australia
+61404900497 (Phone)

HOME PAGE: http://www.usc.edu.au/staff-repository/dr-hammad-siddiqi

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