The Lost Capital Asset Pricing Model

61 Pages Posted: 22 Jan 2018

See all articles by Daniel Andrei

Daniel Andrei

McGill University; Desautels Faculty of Management

Julien Cujean

Institute for Financial Management

Mungo Ivor Wilson

University of Oxford - Said Business School

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Date Written: January 2018

Abstract

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

Andrei, Daniel and Cujean, Julien and Wilson, Mungo Ivor, The Lost Capital Asset Pricing Model (January 2018). CEPR Discussion Paper No. DP12607, Available at SSRN: https://ssrn.com/abstract=3106811

Daniel Andrei (Contact Author)

McGill University ( email )

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Desautels Faculty of Management ( email )

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Julien Cujean

Institute for Financial Management ( email )

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Mungo Ivor Wilson

University of Oxford - Said Business School ( email )

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