58 Pages Posted: 25 Feb 2017 Last revised: 7 Oct 2017
Date Written: October 6, 2017
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: 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