The Lost Capital Asset Pricing Model

79 Pages Posted: 25 Feb 2017 Last revised: 1 Dec 2020

See all articles by Daniel Andrei

Daniel Andrei

McGill University

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: November 30, 2020

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 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 macroeconomic announcement days.

Suggested Citation

Andrei, Daniel and Cujean, Julien and Wilson, Mungo Ivor, The Lost Capital Asset Pricing Model (November 30, 2020). 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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Julien Cujean

Ecole Polytechnique Fédérale de Lausanne ( email )

c/o University of Geneve
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Switzerland

Mungo Ivor Wilson

University of Oxford - Said Business School ( email )

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Great Britain
+44 (0) 1865 288914 (Phone)

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