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 this finding only appears after the CAPM’s publication in the 1960s. I find evidence consistent with the widespread application of the CAPM model generating incentives to tilt portfolios systematically away from low CAPM Alpha assets, causing such assets to be undervalued.

Keywords: capital asset pricing model, factor models, alpha, extrapolative beliefs

JEL Classification: G10, G12