Behavioral Heterogeneity in the CAPM with an Application to the Low-Beta Anomaly

9 Pages Posted: 11 Dec 2019

See all articles by Thorsten Hens

Thorsten Hens

University of Zurich - Department of Banking and Finance; Norwegian School of Economics and Business Administration (NHH); Swiss Finance Institute

Fatemeh Naebi

Allameh Tabataba'i University, Department of Theoretical Economics

Date Written: July 31, 2019

Abstract

This note extends the CAPM to situations where a subset of investors is not mean-variance optimizers. We show that a CAPM relation holds when suitably adjusting beta to the presence of such investors. The adjusted CAPM can be used to reveal which non-mean-variance behavior is needed to explain so-called CAPM anomalies. For example, the adjusted CAPM explains the low-beta anomaly if non-mean-variance investors overweight (underweight) high-beta (low-beta) assets. Our empirical analysis reveals that one needs two thirds of investors to depart from mean-variance analysis in order to explain the low beta anomaly.

Keywords: CAPM, Heterogeneous Behavior, Low Beta Anomaly

JEL Classification: D53, G1, G4

Suggested Citation

Hens, Thorsten and Naebi, Fatemeh, Behavioral Heterogeneity in the CAPM with an Application to the Low-Beta Anomaly (July 31, 2019). Available at SSRN: https://ssrn.com/abstract=3492306 or http://dx.doi.org/10.2139/ssrn.3492306

Thorsten Hens (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 32
Zurich, 8032
Switzerland
+41-44 634 37 06 (Phone)

Norwegian School of Economics and Business Administration (NHH)

Helleveien 30
Bergen, 5045
Norway

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Fatemeh Naebi

Allameh Tabataba'i University, Department of Theoretical Economics ( email )

Ahmad Qasir St/ Abbas Abad St/ Tehran/ Iran
Tehran, Tehran
Iran
+98 21 8872 5400 (Phone)

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