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A New Model of Capital Asset PricesAsset Pricing Evolution

A New Model of Capital Asset Prices: Asset Pricing Evolution [Based on the groundbreaking work by Markowitz (1959) on the mean-variance investment parabola and concept of diversification, the renowned Capital Asset Pricing Model (CAPM) of Sharpe (1964) and others proposed an equilibrium pricing framework that became the main branch of a new field of finance literature known as asset pricing. Black (1972) extended their analyses to develop a more general asset pricing model named the zero-beta CAPM. After reviewing these foundational asset pricing models, the present book derives a special case of the zero-beta CAPM dubbed the ZCAPM. This theoretical derivation is crucial to the specification of the empirical ZCAPM, which we use to estimate the ZCAPM using U.S. stock returns. By contrast, popular multifactor models dominating the asset pricing literature nowadays have little or no theoretical justification; instead, they use empirical tests to search for possible asset pricing factors. Following Fama and French (1992, 1993, 1995, 1996), who have argued that the CAPM is dead due to its empirical failure, multifactor models typically employ long/short portfolios formed from different firm characteristics. With no connection to the general equilibrium framework of the CAPM, the growing number of multifactors and resultant shopping mall of contender models have evolved into a separate branch in the evolutionary tree of asset pricing. Based on over 50 years of U.S. stock returns, we compare our empirical ZCAPM to popular multifactor models. As we will see, extensive empirical tests not only support the ZCAPM but consistently dominate those of other models. In view of these exceptional results, we subsequently apply the ZCAPM to practical investment problems, including the momentum mystery as well as construction of diversified, high-performing portfolios. Taken as a whole, we believe that the theoretical and empirical ZCAPM presented in this book represent the next evolutionary step in asset pricing. As we will see, the ZCAPM not only revives the CAPM but grafts multifactor models onto the original main branch of asset pricing.] http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png

A New Model of Capital Asset PricesAsset Pricing Evolution

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References (52)

Publisher
Springer International Publishing
Copyright
© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021
ISBN
978-3-030-65196-1
Pages
3 –21
DOI
10.1007/978-3-030-65197-8_1
Publisher site
See Chapter on Publisher Site

Abstract

[Based on the groundbreaking work by Markowitz (1959) on the mean-variance investment parabola and concept of diversification, the renowned Capital Asset Pricing Model (CAPM) of Sharpe (1964) and others proposed an equilibrium pricing framework that became the main branch of a new field of finance literature known as asset pricing. Black (1972) extended their analyses to develop a more general asset pricing model named the zero-beta CAPM. After reviewing these foundational asset pricing models, the present book derives a special case of the zero-beta CAPM dubbed the ZCAPM. This theoretical derivation is crucial to the specification of the empirical ZCAPM, which we use to estimate the ZCAPM using U.S. stock returns. By contrast, popular multifactor models dominating the asset pricing literature nowadays have little or no theoretical justification; instead, they use empirical tests to search for possible asset pricing factors. Following Fama and French (1992, 1993, 1995, 1996), who have argued that the CAPM is dead due to its empirical failure, multifactor models typically employ long/short portfolios formed from different firm characteristics. With no connection to the general equilibrium framework of the CAPM, the growing number of multifactors and resultant shopping mall of contender models have evolved into a separate branch in the evolutionary tree of asset pricing. Based on over 50 years of U.S. stock returns, we compare our empirical ZCAPM to popular multifactor models. As we will see, extensive empirical tests not only support the ZCAPM but consistently dominate those of other models. In view of these exceptional results, we subsequently apply the ZCAPM to practical investment problems, including the momentum mystery as well as construction of diversified, high-performing portfolios. Taken as a whole, we believe that the theoretical and empirical ZCAPM presented in this book represent the next evolutionary step in asset pricing. As we will see, the ZCAPM not only revives the CAPM but grafts multifactor models onto the original main branch of asset pricing.]

Published: Mar 2, 2021

Keywords: Asset pricing; CAPM; Cross-sectional return dispersion; Cross-sectional tests; Fischer Black; Harry Markowitz; Investment parabola; Market factor; Multifactor models; Portfolio analysis; Return dispersion; Securities investment; Stock market; Richard Roll; William Sharpe; ZCAPM; Zero-beta CAPM

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