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The Lost Capital Asset Pricing Model

58 Pages Posted: 25 Feb 2017 Last revised: 7 Oct 2017

Daniel Andrei

University of California, Los Angeles (UCLA) - Anderson School of Management

Julien Cujean

Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne

Mungo Ivor Wilson

University of Oxford - Said Business School

Date Written: October 6, 2017

Abstract

A flat Securities Market Line is not evidence against the CAPM. Under the Roll (1977) critique, the CAPM is a “lost city of Atlantis,” empirically invisible. In a noisy rational-expectations economy, there exists an information gap between the average investor who holds the market and the empiricist who does not observe the market portfolio. The CAPM holds for the investor, but appears flat to the empiricist. This distortion is empirically substantial and explains, for instance, why “Betting Against Beta” works; BAB really bets on true beta. Macroeconomic announcements reduce the distortion—for a fleeting moment the empiricist catches a glimpse of the CAPM.

Suggested Citation

Andrei, Daniel and Cujean, Julien and Wilson, Mungo Ivor, The Lost Capital Asset Pricing Model (October 6, 2017). Available at SSRN: https://ssrn.com/abstract=2922598

Daniel Andrei (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Julien Cujean

Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

Mungo Ivor Wilson

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 (0) 1865 288914 (Phone)

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