The Lost Capital Asset Pricing Model

46 Pages Posted: 25 Feb 2017 Last revised: 14 Aug 2018

Daniel Andrei

McGill University

Julien Cujean

Ecole Polytechnique Fédérale de Lausanne - 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: August 10, 2018

Abstract

A flat Securities Market Line is not evidence against the CAPM. In a rational-expectations economy in which markets are not informationally efficient, the CAPM holds but is rejected empirically (Type I Error). There exists an information gap between the empiricist and the average investor who clears the market. The CAPM holds unconditionally for the investor, but appears flat to the empiricist who uses the correct unconditional market proxy. This distortion is empirically substantial and offers a new interpretation of why “Betting Against Beta” works: BAB really bets on true beta. The empiricist retrieves a stronger CAPM on macroeconomic announcement days.

Suggested Citation

Andrei, Daniel and Cujean, Julien and Wilson, Mungo Ivor, The Lost Capital Asset Pricing Model (August 10, 2018). Available at SSRN: https://ssrn.com/abstract=2922598 or http://dx.doi.org/10.2139/ssrn.2922598

Daniel Andrei (Contact Author)

McGill University ( email )

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

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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