Alpha Found: The Mathematical Structure of CAPM, EMH, and the Volatility Effect

44 Pages Posted: 22 Jan 2021

Date Written: November 14, 2020

Abstract

With the volatility effect as a gateway, this paper constructs a new single-factor return model for capital asset prices. The model is built using only elementary techniques. To accomplish this, a new risk measure is introduced such that the volatility effect becomes not an economic or behavioral anomaly, but a mathematical expectation. Consequently, common performance evaluation measures come under new scrutiny. CAPM is shown to be a special case of a more general single-factor model. The ex-ante model and methods have strong explanatory value at the level of analytical expression and simulation. The ex-post estimation techniques give a range of possible ex-ante conditions that lead to market outcomes.

Keywords: Alpha CAPM Volatility

JEL Classification: G

Suggested Citation

Bowling, Michael, Alpha Found: The Mathematical Structure of CAPM, EMH, and the Volatility Effect (November 14, 2020). Available at SSRN: https://ssrn.com/abstract=3730723 or http://dx.doi.org/10.2139/ssrn.3730723

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