Information and Capital Asset Pricing

54 Pages Posted: 31 May 2007

See all articles by Baibing Li

Baibing Li

Loughborough University

Xiangkang Yin

Deakin University; Financial Research Network (FIRN)

Date Written: May 2007

Abstract

Investors in a market frequently update their diverse perceptions of the values of risky assets, thus invalidating the classic CAPM's assumption of compete agreement among investors. To accommodate information asymmetry and belief updating, we develop an information-adjusted CAPM, which states that the expected excess return of a risky asset/portfolio is solely determined by information-adjusted beta rather than market beta. The new model can successfully explain empirical anomalies of the classic CAPM, including a flatter relation between average return and market beta than the CAPM predicts, a non-zero Jensen's alpha, insignificant explanatory power of market beta, and size and value effects.

Keywords: Asset Pricing, Asymmetric Information, CAPM anomaly, Rational Expectations Equilibrium

JEL Classification: G100, G110, G120, G140

Suggested Citation

Li, Baibing and Yin, Xiangkang, Information and Capital Asset Pricing (May 2007). Available at SSRN: https://ssrn.com/abstract=988623 or http://dx.doi.org/10.2139/ssrn.988623

Baibing Li

Loughborough University ( email )

Ashby Road
Nottingham NG1 4BU
Great Britain

Xiangkang Yin (Contact Author)

Deakin University ( email )

Melbourne, Victoria
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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