Beta, as measured by the Capital Asset Pricing Model (CAPM), is widely used for pricing stocks, determining the cost of capital, and gauging the extent to which markets are integrated. The CAPM model assumes that equilibrium conditions prevail. The choice of which market portfolio to use in the regression – the home country or global index – depends on the level of global market integration. We...

This paper derives the equilibrium of an in ̄nite-horizon discrete-time CAPM economy in which agents have discounted expected quadratic utility functions. We show that there is an income stream obtainable by trading on the ̄nancial markets which best approximates perfect consumption smoothing (called the least variable income stream or LVI) such that the equilibrium consumption of each agent is ...

This article describes the academic debate about the usefulness of the capital asset pricing model (the CAPM) developed by Sharpe and Lintner. First the article describes the data the model is meant to explain—the historical average returns for various types of assets over long time periods. Then the article develops a version of the CAPM and describes how it measures the risk of investing in p...

This paper attempts to determine the certainty equivalent of an uncertain future cash flow or value through the option pricing method, and builds models of certainty equivalent and certainty equivalent coefficient. Based on the model of certainty equivalent coefficient, this paper further derives models of risk premium and risk-adjusted discount rate. The latter is a new capital asset pricing m...

Evidence indicates that people fear change and the unknown. We model this behavior as familiarity bias in which individuals focus on adverse scenarios in evaluating defections from the status quo. The model explains portfolio underdiversification, home and local biases. More importantly, equilibrium stock prices reflect an unfamiliarity premium. In an international setting, our model predicts t...

We consider a simple CAPM with heterogenous expectations on assets’ mean returns and homogenous expectations on the covariance of returns. In this model alpha-opportunities naturally arise in a financial market equilibrium. We show that that the hunt for alpha-opportunities is a zero-sum game and that alpha-opportunities erode with the assets under management. Moreover, it is shown that a posit...

We examine the implications of shortand long-run consumption growth fluctuations on the momentum and contrarian profits and the value premium in a unified economic framework. By allowing time-varying firm cash flow exposures to the short-run and long-run shocks in consumption growth, we find the otherwise standard intertemporal asset pricing model goes a long way in generating the momentum and ...

In this article, we focus on the estimation of the capital asset pricing model (CAPM) at different time scales for Chile’s stock market. Our sample is comprised of twenty four stocks that were actively traded on the Santiago Stock Exchange over 1997–2002. We find evidence in support of the CAPM at a medium–term horizon. We extend the literature in this area to analyze the impact of time scaling...

We show in any economy trading options, with investors having mean-variance preferences, that there are arbitrage opportunities resulting from negative prices for out of the money call options. The theoretical implication of this inconsistency is that mean-variance analysis is vacuous. The practical implications of this inconsistency are investigated by developing an option pricing model for a ...