The Lost Capital Asset Pricing Model

88 Pages Posted: 25 Feb 2017 Last revised: 3 Dec 2021

See all articles by Daniel Andrei

Daniel Andrei

McGill University; Desautels Faculty of Management

Julien Cujean

Ecole Polytechnique Fédérale de Lausanne

Mungo Ivor Wilson

University of Oxford - Said Business School

Multiple version iconThere are 2 versions of this paper

Date Written: December 2, 2021

Abstract

We provide a novel explanation for the empirical failure of the CAPM despite its widespread practical use. In a rational-expectations economy in which information is dispersed, variation in expected returns over time and across investors creates an informational gap between investors and the empiricist. The CAPM holds for investors, but the Securities Market Line appears flat to the empiricist. Variation in expected returns across investors accounts for the larger part of this distortion, which is empirically substantial; it offers a new interpretation of why “Betting Against Beta” works: BAB really bets on true beta. The empiricist retrieves a stronger CAPM on days when public information reduces disagreement among investors.

Suggested Citation

Andrei, Daniel and Cujean, Julien and Wilson, Mungo Ivor, The Lost Capital Asset Pricing Model (December 2, 2021). Available at SSRN: https://ssrn.com/abstract=2922598 or http://dx.doi.org/10.2139/ssrn.2922598

Daniel Andrei (Contact Author)

McGill University ( email )

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Canada

Desautels Faculty of Management ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada

Julien Cujean

Ecole Polytechnique Fédérale de Lausanne ( email )

c/o University of Geneve
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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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