The Unintended Impact of Academic Research on Asset Returns: The CAPM Alpha

Abstract

This paper explores a channel whereby asset-pricing anomalies can appear as investors alter portfolios according to findings in academic research. In particular, I find that assets with low realized CAPM alphas outperform those with high ones, but only after the CAPM’s publication in the 1960s. In a multifactor world the CAPM is misspecified. Then, its widespread application and the multifactor literature that followed generated incentives for fund managers to tilt portfolios systematically away from low CAPM alpha assets, causing such assets to be undervalued. My results also provide an alternative explanation for existing anomalies based on past return patterns.

Keywords: capital asset pricing model, alpha, benchmarking, mutual funds, smart beta, anomalies.

JEL Classification: G10, G12