Investor Psychology and Tests of Factor Pricing Models
نویسندگان
چکیده
We provide a model with overconfident risk neutral investors in which (i) low book-to-market firms have high betas but on average earn low returns; (ii) a factor-mimicking portfolio such as HML earns positive expected returns; (iii) such a portfolio loads on fundamental macroeconomic variables; (iv) the loadings of securities on such portfolios positively forecast cross-sectional future returns; and (v) loadings on such a portfolio have incremental power to predict returns after controlling for characteristics. Thus, an empirical finding that covariances beat characteristics does not provide any greater support for a rational risk theory over a be-havioral setting with no risk premia. The analysis also reconciles the high risk (market betas) of low book-to-market firms with their low expected returns, and offers new empirical implications that distinguish behavioral and rational pricing approaches.
منابع مشابه
The Expansion of Capital Asset Pricing Factor Models through Pricing Value ، Momentum and stock quality at Tehran stock exchange
Considering the inverse relationship between the value and momentum factors and the lack of simultaneous use of them in capital asset pricing models as well as non-use of stock quality as representative of profitability ans investment factors such as CAPM and Fama and French's three-factor models, the basis of this study is to provide a new functional model has been replacing pricing models o...
متن کاملExplaining Accrual Anomaly Using Multi-factor Pricing Model in Tehran Stock Exchange
Objective: The main objective of this research is to explain the accrual anomaly using accruals factor (CMA) and accrual-based factor-mimicking portfolios as well as checking whether accrual anomaly is risk-based or mispricing. According to rational frictionless asset pricing model, the ability of accruals to predict returns should come from the loadings on this accrual factor loading that pred...
متن کاملOptimizing Financial Asset Pricing Using Quantitative Behavioral Bias Measurement
Optimization of pricing financial assets less an emerging discipline that attempts to model the impact of biases that investors in asset prices. This article provides an overview of the theoretical foundations and challenges and offers some solutions in this field. The paper is divided into two parts. In the first part of the paper, an overview of the selected literature is presented on key the...
متن کاملDynamic asset pricing model with heterogeneous sentiments
a r t i c l e i n f o The systematic and important role of investor sentiment has been supported by some recent empirical and theoretical literatures. In this paper, we present a dynamic asset pricing model with heterogeneous sentiments and we find that the equilibrium stock price is the wealth-share-weighted average of the stock prices that would prevail in an economy with one sentiment invest...
متن کاملEmpirical Cross-Sectional Asset Pricing∗
I review recent research efforts in the area of empirical cross-sectional asset pricing. I start by summarizing the evidence on cross-sectional return predictability and the failure of standard (consumption) CAPM models and their conditional versions to explain these predictability patterns. One response in part of the recent literature is to focus on adhoc factor models, which summarize the cr...
متن کاملThe Integration of Multi-Factor Model of Capital Asset Pricing and Penalty Function for Stock Return Evaluation
One of the main concerns of investors is the evaluation of the return on investment, which is conducted using various models such as the CAPM (single-factor model), Fama-French three/five-factor models, and Roy and Shijin’s six-factor model and other models known as multi-factor models. Despite the widespread use of these models, their major drawbacks include sensitivity to unexpected changes, ...
متن کامل